A Great Candidate For Shareholder Returns: Capitala Finance

• The share price of Capitala Finance Corp CPTA has declined more than 25 percent year-to-date.
• Troy Ward of Keefe, Bruyette & Woods has initiated coverage of Capitala Finance with a Market Perform rating and price target of $17.50.
• Ward believes that the stock is likely to continue to at a discounted valuation until the management can provide greater assurance regarding the sustainability of the dividend.

According to the KBW report, Capitala Finance “has a sizable origination franchise with a lending focus on smaller companies that we believe can generate attractive shareholder returns.”

In addition, the company’s strong balance sheet, which includes meaningful SBIC leverage, positions Capitala Finance to be a “long-term winner in the BDC industry.”

However, the current dividend is not as yet being covered by the company’s operating income, and Ward believes that the management needs to show that “the dividend can be covered from sustainable operating earnings.”

Ward expects the company’s earnings to be affected by origination activity levels in 2016, given that Capitala Finance records its origination fees upfront, rather than amortizing the fees over the tenure of the investment.