Capital Southwest: Time To Pull The Buy Trigger (Upgrade)

Summary

• Capital Southwest's stock correction, triggered by higher non-accruals and lower net investment income, presents a buying opportunity at $21.50 for passive income investors.
• Despite the increased non-accrual ratio, Capital Southwest's First Lien portfolio grew to $1.4 billion, with cash interest collection up 2% QoQ.
• The base dividend was raised to $0.58 per share, but the rising dividend pay-out ratio to 100% raises concerns about future supplemental dividends.
• To restore investor confidence, Capital Southwest needs to lower its non-accrual ratio, avoid dilutive convertibles, and improve its dividend pay-out ratio to 80-85%.