On Monday, Lucid (NASDAQ:LCID) Capital Markets initiated coverage on shares of Capital Southwest Corp (NASDAQ:CSWC) with a Neutral rating and a price target of $25.00. The firm's analysis suggests that the company should trade at approximately 150% of its 2025 year-end Net Asset Value (NAV) estimate of $16.77.
Capital Southwest has maintained leverage below its target range amid recent economic uncertainties. However, the company has experienced an increase in Net Investment Income (NII) due to the asset-sensitive nature of its balance sheet and portfolio growth. This has allowed for an uptick in both regular and supplemental dividends.
Despite a decrease in short-term interest rates, which could potentially challenge NII, the analyst does not foresee a risk to the dividend. The potential for an economic soft landing and an improved lending environment could lead Capital Southwest to increase leverage in the future.
Currently, Capital Southwest's stock is trading slightly below the peer average Price/NAV multiple of 147% for internally managed Business Development Companies (BDCs). The firm believes the shares are fairly valued at present.
The $25.00 price target is based on a projected 9.3% dividend yield for the fiscal year 2025, which anticipates regular dividends of $2.32. This compares to a 10.0% dividend yield at the current share price. In comparison, a peer group of internally-managed BDCs trades at a median P/NAV of 147% and a median dividend yield of 12.6%.
In other recent news, Dallas-based investment firm Capital Southwest Corporation has announced a public offering of unsecured convertible notes due in 2029, managed by Oppenheimer & Co. The firm plans to utilize the proceeds to redeem its 4.50% Notes due 2026, repay a portion of the outstanding indebtedness under its senior secured revolving credit facility with ING Capital LLC, and for general corporate purposes.
Simultaneously, Capital Southwest has made significant updates to its 'at-the-market' (ATM) offering program, transitioning the program to a new shelf registration statement, with a potential to raise up to $1.0 billion.
In the financial performance sphere, the firm reported pre-tax net investment income reaching $0.64 per share for the second quarter of fiscal year 2025, with a regular dividend declared at $0.58 per share. The company's credit portfolio, predominantly backed by private equity firms, grew to $1.4 billion, and the firm raised $21 million through its ATM program.
Although total investment income decreased to $48.7 million, Capital Southwest anticipates significant net portfolio growth in the upcoming quarters. These recent developments reflect the company's disciplined investment strategy and potential for future growth.
InvestingPro Insights
Capital Southwest Corp's financial metrics and market performance offer additional context to Lucid Capital Markets' analysis. According to InvestingPro data, the company's market capitalization stands at $1.11 billion, with a P/E ratio of 14.1, indicating a relatively modest valuation compared to earnings. The company has demonstrated strong revenue growth, with a 27.41% increase in the last twelve months as of Q2 2025, and a 13.86% quarterly growth in the same period.
One of the most striking features of Capital Southwest is its dividend policy. An InvestingPro Tip highlights that the company "pays a significant dividend to shareholders," which is further supported by the impressive dividend yield of 10.86% as of the latest data. This aligns well with Lucid Capital Markets' focus on the company's dividend performance and projections. Moreover, another InvestingPro Tip notes that Capital Southwest "has maintained dividend payments for 42 consecutive years," underscoring the company's commitment to shareholder returns even in challenging economic environments.
The company's profitability is also noteworthy, with an InvestingPro Tip confirming that it has been "profitable over the last twelve months." This is reflected in the robust EBITDA growth of 30.52% in the last twelve months as of Q2 2025, suggesting strong operational performance.
While these insights generally support the neutral stance taken by Lucid Capital Markets, investors might want to consider the additional 3 InvestingPro Tips available for a more comprehensive analysis of Capital Southwest Corp's financial health and market position.
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