Saratoga Investment Dividend Not Covered by Earnings

Saratoga Investment (SAR) posted net investment income of 47 cents a share for the quarter ended May 31, missing the 54-cent consensus estimate. A year earlier, the business development company earned 66 cents a share. The quarterly dividend is 75 cents, paid at 25 cents a month. The shortfall means the payout is not covered by current earnings.

Write-downs pushed net asset value down $1.19 a share in the quarter, a roughly 5% decline. Quality BDCs rarely lose that much NAV in a single period. Debt-to-equity ticked up while assets-to-liabilities held roughly flat, nudging the balance sheet toward a more precarious position.

Saratoga is the earliest reporter among BDCs with baby bonds outstanding. Most peers report in late July or early August. The company uses a May 31 fiscal year-end instead of the more common June 30 close.

BDCs can typically recover from a bad quarter or two. A general economic slowdown would make the task harder. Investors holding Saratoga debt should check their concentration. The situation is not an emergency. We own two baby bond issues but cut the position in half in February and will reassess.