2 Big Yields Firing On All Cylinders

Core Insights - The article emphasizes the importance of the payback period as a measure of investment performance, alongside total returns and capital appreciation [1][2] Company Analysis: Capital Southwest (CSWC) - CSWC offers an attractive yield of 8.7% and is characterized as an internally managed business development company (BDC) with a diversified portfolio [3] - The investment portfolio is heavily weighted towards first lien secured debt investments, comprising 89% of the total portfolio, with significant exposure to defensive industries such as Healthcare and Consumer Products [4] - CSWC's portfolio value grew by $0.1 billion to $1.5 billion in fiscal Q4 '24, reflecting its ability to raise equity capital at a premium to net asset value [5] - The weighted average yield on debt investments is 13.3%, consistent with the previous year, while NAV per share increased by $0.40 year-over-year to $16.77 [6] - CSWC generated net investment income (NII) per share of 0.68 in fiscal Q4 '24, resulting in a 119% dividend coverage, and has paid two special dividends of $0.06 in addition to the regular quarterly dividend of $0.57 [7] - The company maintains a low-cost structure with an operating leverage ratio of 1.7%, the second-lowest in the BDC segment [8] - CSWC has a strong balance sheet with a regulatory debt-to-equity ratio of 0.82x, well below the statutory limit of 2.0x, and is in the process of obtaining a second SBIC license to enhance lending capacity [9] - Despite a current price of $26.50 and a Price-to-NAV of 1.58x, CSWC's valuation is competitive compared to peers [10] - The company is valued based on P/E rather than P/NAV, with a P/E of 9.8x, and scores a 4.05 on the Quant Rating scale, indicating strong valuation and profitability [11][12] Company Analysis: Brookfield Infrastructure Partners (BIP) - BIP offers a yield of 5.3% and invests in mission-critical assets across various sectors, including energy pipelines and data centers, aiming for stable cash flows [13] - The company has achieved a compound annual growth rate in shareholder distribution of 8% over the past decade, with a 67% FFO payout ratio ensuring distribution protection [14] - FFO per share grew by 8% year-over-year to $0.78 in Q1 2024, driven by strong transportation volumes and higher contracted revenues [15] - Management targets total annual returns of 12-15% on invested capital, focusing on growth in transmission and data centers, with plans for incremental processing capacity in Canadian natural gas [16] - BIP maintains a strong BBB+ rated balance sheet with $2.0 billion in total liquidity and 90% of its debt at fixed rates [17] - The current price of $30.64 reflects an appealing Price-to-CF ratio of 3.2x, at the low end of its 3-year range, with management projecting 5-9% annual distribution growth [18][19]