Small Caps, Huge Dividends, 1 Winner

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I screen for companies that pay outsized dividends on a regular basis. Small cap companies that pay good dividends are my favorites. Using the Motley Fool CAPS Screener I look for companies that pay dividends of at least 7%. I not only ask for a high dividend, but at least 15% revenue growth, and 20% EPS growth. A large dividend from a fast growing company is like getting the best of both worlds. There are 2 companies, in the same industry, from this screen that have either 4 or 5 star ratings from the Motley Fool CAPS community. They are: Main Street Capital Corporation (NYSE: MAIN) and Triangle Capital Corp. (NYSE: TCAP).

These two companies are in the business of developing businesses. I will say upfront that I own Triangle Capital and have espoused the benefits of owning this company in a prior post. I still believe Triangle Capital is an excellent investment idea, but I have not researched Main Street Capital before. Since sometimes the grass is greener on the other side, I never turn down an opportunity to compare one of my holdings to a company I haven't owned. We'll compare the two, keep score, and see which business developer might warrant your investing dollars.

<table> <tbody> <tr> <td> <p><strong>Name</strong></p> </td> <td> <p><strong>Price</strong></p> </td> <td> <p><strong>P/E On '12 Earnings</strong></p> </td> <td> <p><strong>Growth Expected</strong></p> </td> <td> <p><strong>PEG</strong></p> </td> </tr> <tr> <td> <p>Main Street Capital</p> </td> <td> <p>$24.27</p> </td> <td> <p>12.91</p> </td> <td> <p>7.00%</p> </td> <td> <p>1.84</p> </td> </tr> <tr> <td> <p>Triangle Capital</p> </td> <td> <p>$19.23</p> </td> <td> <p>9.33</p> </td> <td> <p>10.00%</p> </td> <td> <p>0.93 </p> </td> </tr> </tbody> </table>

Right away it looks like Triangle Capital is the better value. With the company trading near the low end of its 5 year historical P/E ratio (between 4 and 28), and the higher growth rate this one is pretty straightforward. (Main Street – 1, Triangle – 2)

Knowing that Triangle has the higher future growth rate is fine, if that rate of growth is realistic. One way I try to determine if a future growth rate is likely is by looking at prior growth. History may not repeat itself, but it can sometimes serve as a guide. Triangle has been growing earnings at over 16% in the last few years. Main Street has been growing earnings by 9.6%. (Main Street – 1, Triangle - 2)

Another factor that can tell us whether to expect better than expected growth going forward is, each company's performance versus estimates. Here is how they compare:

<table> <tbody> <tr> <td> <p><strong>Name</strong></p> </td> <td> <p><strong>Beat Estimates</strong></p> </td> <td> <p><strong>Missed Estimates</strong></p> </td> <td> <p><strong>Avg. Beat or Miss</strong></p> </td> </tr> <tr> <td> <p>Main Street</p> </td> <td> <p>4</p> </td> <td> <p>0</p> </td> <td> <p>10.83%</p> </td> </tr> <tr> <td> <p>Triangle Capital</p> </td> <td> <p>4</p> </td> <td> <p>0</p> </td> <td> <p>14.70% </p> </td> </tr> </tbody> </table>

With the higher average beat of earnings estimates, Triangle wins this one. (Main Street – 1, Triangle - 2)

Since both of these companies pay out impressive dividends, there are two factors in play. First, Triangle Capital pays the better current yield, at 9.78% versus 6.92% for Main Street. The second factor is each company's dividend growth. Main Street has been raising its dividend more in the last 3 years, with an average raise of 23.1%. Triangle by contrast, has raised its dividend by about 4.2% per year. Given the growth expectations going forward, it seems Triangle gets the nod. If Main Street grows at 7%, it's not likely the company will continue to increase its dividend by more than 7%. Triangle is expected to grow at 10%, and already has a significant lead in dividend yield. All things being equal, most investors would prefer the nearly 10% yield that Triangle offers versus 7% for Main Street. (Main Street – 1, Triangle – 2)

Last but not least, we need to look at each company's balance sheet. Main Street shows an equity-to-assets ratio of 0.55, versus Triangle's equity-to-assets ratio is 0.57. With such a small difference we'll call this a tie. (Main Street – 1, Triangle – 1)

This contest ends up being very one sided. While Main Street Capital has a lot of positive traits, Triangle won every category, except the balance sheet comparison, which was a tie. What is ironic is the CAPS community rates Main Street Capital as a 5 star stock, while Triangle Capital gets 4 stars. Both are bullish calls, but I think the monthly dividend from Main Street Capital is getting too much attention. With better expected growth, a cheaper valuation, and a higher yield, Triangle Capital seems like the better buy. Use this data as a starting point for your own research and see if one of these companies deserves a spot in your portfolio.


The Motley Fool has no positions in the stocks mentioned above. MHenage owns shares of Triangle Capital. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

blog comments powered by Disqus