PennantPark Investment Corp.: A Case in Earnings Quality

When it comes to stocks, I have a simple rule: Earnings are best when they look most like cash.

PennantPark Investment Corp.'s (NASDAQ: PNNT) shareholders should spend some time thinking about the quality of the earnings of this business development company (BDC). While the company is generally earning more than its dividend after excluding some one-time items, approximately 39% of its earnings are coming from just one non-cash source.

By law, BDCs that operate as regulated investment companies -- which includes basically all of the high-yield BDCs -- are required to distribute all of their earnings to shareholders each year in dividends. That's why BDCs can yield 10% or more -- virtually all of their income is going out the door when dividends are paid.

Source: Fool.com