Updated 3/6/25

Capital Southwest Corporation (CSWC) is a business development company (BDC) that focuses on financing middle-market businesses. Based in Dallas, Texas, CSWC primarily invests in debt and equity, making it a go-to option for investors looking for high-yield dividend opportunities. With a forward dividend yield above 11%, the stock stands out in the world of income investing. However, a high yield always raises questions about sustainability and long-term value. Let’s break it all down.

Key Dividend Metrics

💰 Dividend Yield: 11.31%
📈 5-Year Average Yield: 9.72%
📆 Ex-Dividend Date: March 14, 2025
💵 Payout Ratio: 180.71%
🔄 Dividend Growth: Consistent but requires careful monitoring

Dividend Overview

CSWC has established itself as a strong dividend payer, offering an impressive yield that far surpasses the average in most traditional income-focused stocks. Currently, the company distributes a quarterly dividend of $0.56 per share, along with a $0.06 supplemental dividend set for March 2025.

One of the biggest attractions for dividend investors is this history of extra payouts, but there’s a catch. Supplemental dividends are great when business is strong, but they aren’t guaranteed. If earnings dip or credit markets tighten, those additional payouts could disappear quickly.

A key point of concern is the payout ratio, which sits at a staggering 180.71%. This means the company is paying out far more than it earns, which isn’t something that can continue indefinitely. Most business development companies aim to distribute nearly all their earnings, but this level of payout suggests CSWC is leaning on retained earnings or investment gains to sustain distributions.

Dividend Growth and Safety

Dividend growth is always an important factor for long-term investors, and CSWC has delivered steady increases over time. However, cracks are starting to appear.

The company’s trailing annual dividend yield sits at 10.22%, slightly below the forward yield. That may indicate investor skepticism about the sustainability of the current payouts. More importantly, earnings have taken a hit, with a sharp 30.7% decline in quarterly earnings growth compared to the previous year. Since business development companies rely heavily on net investment income (NII) to fund their dividends, any prolonged weakness in earnings could force a reduction in payments.

Another factor that raises concern is the company’s leverage. CSWC’s debt-to-equity ratio stands at 111.47%, meaning it’s borrowing heavily to fund operations and investments. This level of leverage isn’t uncommon in the BDC space, but it does increase risk, especially in a rising interest rate environment where borrowing costs are higher.

Chart Analysis

Price Action and Moving Averages

The chart for Capital Southwest Corporation (CSWC) shows a clear shift in trend over the past year. Early on, the stock experienced a strong uptrend, peaking around mid-year before losing momentum. The 50-day moving average (orange line) crossed below the 200-day moving average (blue line) in late fall, a classic death cross signal, which often indicates a transition into a longer-term downtrend.

More recently, the price attempted a recovery from December’s lows but has struggled to reclaim higher levels. The 22.50-23.00 range seems to be acting as resistance, as the stock has bounced off this area multiple times. With the 50-day moving average flattening and hovering near the current price, CSWC appears to be at a key decision point—either it breaks higher and regains upward momentum or falls back into the previous downtrend.

Volume and Market Participation

The volume bars reveal interesting dynamics in buying and selling pressure. Noticeably high volume spikes occurred in October and November, corresponding with sharp declines in price. This indicates strong selling pressure during those months. Since then, volume has remained elevated but less extreme, suggesting that while sellers have dominated at times, there are buyers stepping in to absorb shares.

The most recent volume trends show mixed activity, with some green bars signaling buying interest, but overall, there isn’t a clear sign of sustained accumulation. If the stock is to move higher, a breakout above 23.00 with strong volume would be a healthier confirmation of renewed buying interest.

Relative Strength Index (RSI)

The RSI indicator at the bottom of the chart has been fluctuating, reflecting shifts in momentum. During the stock’s steep decline in late fall, RSI dipped into oversold territory (below 30), indicating extreme selling pressure. Since then, RSI recovered to near 60 in February before rolling over again.

Currently, RSI is in a downtrend, moving away from the mid-range of 50. This suggests weakening momentum, though it hasn’t yet reached oversold levels. If RSI continues lower, it could indicate further downside risk. A reversal back toward 60 or higher would signal increasing strength.

Key Levels to Watch

• Support: The $21.50-$22.00 range has held as a strong support zone, as seen in past rebounds from this area. If the stock revisits this level, buyer strength will be tested.
• Resistance: The $23.00-$23.50 range is a critical short-term barrier. A break above this with strong volume could signal a move toward the mid-$24s.
• Moving Averages: The 50-day moving average is acting as dynamic resistance. A sustained close above this level could indicate a shift in trend.

CSWC’s price action suggests a stock at a crossroads, with technical indicators offering mixed signals. Whether it breaks higher or reverses lower will likely depend on volume confirmation and broader market conditions.

Analyst Ratings

Recent Upgrades

In the past year, Capital Southwest Corporation (CSWC) has experienced several analyst upgrades. Notably, on December 9, 2022, B. Riley Securities upgraded the stock from ‘Neutral’ to ‘Buy’, setting a price target of $20. This upgrade was attributed to the belief that previous price weaknesses had created a buying opportunity for investors. Additionally, Raymond James raised its price target on January 31, 2024, from $24 to $26.50, maintaining an ‘Outperform’ rating. This adjustment reflected optimism about the company’s performance and potential for growth.

Recent Downgrades

Conversely, CSWC has also faced downgrades. On May 15, 2024, JMP Securities downgraded the stock from ‘Market Outperform’ to ‘Market Perform’. This change was based on concerns regarding the company’s valuation and potential headwinds in its operating environment. Similarly, B. Riley Securities downgraded CSWC to ‘Neutral’ from ‘Buy’ on January 8, 2024, citing a shifting backdrop that could impact the company’s future performance.

Consensus Price Target

As of the latest analyses, CSWC holds a consensus price target of approximately $24.50. This target suggests a modest upside potential from its current trading price, reflecting a balanced view among analysts regarding the company’s prospects. The consensus indicates that while there are growth opportunities, there are also challenges that the company may need to navigate in the near term.

Earning Report Summary

Capital Southwest Corporation (CSWC) just released its latest earnings report, giving investors a clearer picture of how the company is performing. While there were some bright spots, a few areas raise questions about what’s next for the stock.

Earnings and Revenue Performance

CSWC reported earnings per share (EPS) of $0.63, just a bit higher than what analysts expected at $0.62. It wasn’t a huge beat, but it’s a sign that the company is staying steady. Revenue came in at $51.97 million for the quarter, up from $48.57 million last year. That’s about a 7% increase, showing that CSWC is still growing its income even with some challenges in the market.

Net Income Takes a Hit

One area of concern was net income, which dropped to $16.27 million compared to $23.48 million in the same quarter last year. That’s a noticeable decline, and while it doesn’t spell immediate trouble, it does suggest that profitability is under some pressure. It’ll be important to see whether this trend continues in the coming quarters.

Dividend Remains a Key Focus

For income investors, the dividend remains one of the biggest reasons to watch CSWC. The company declared total dividends of $0.63 per share for the quarter, which includes a regular payout of $0.57 and a supplemental dividend of $0.06. Despite some earnings pressure, CSWC is keeping its shareholder returns strong, a sign that management remains committed to maintaining its dividend policy.

Investment Activity and Portfolio Health

The company’s investment portfolio is valued at about $1.4 billion, with most of that (97%) tied up in first-lien senior secured debt. This structure helps keep risk in check while generating steady income. During the quarter, CSWC made $110.2 million in new credit investments and another $6.1 million in equity co-investments, showing that it’s still actively expanding its portfolio.

One number investors are watching closely is non-accruals, which now stand at $29.4 million, or 2.2% of the total portfolio. This represents the portion of investments that aren’t currently generating income. While it’s not a huge issue yet, if this number keeps climbing, it could start to weigh on overall performance.

Balance Sheet and Liquidity

The company ended the quarter with $23.6 million in cash and total net assets of $721 million. Net asset value (NAV) per share came in at $16.77, giving investors a rough idea of the company’s intrinsic worth.

Looking Ahead

CSWC’s management was upbeat about the quarter, pointing to $116 million in new investments and continued opportunities in the middle-market lending space. While earnings and net income weren’t perfect, the company remains focused on maintaining strong dividends and expanding its portfolio. Investors will want to keep an eye on how non-accruals evolve and whether revenue growth continues into next quarter.

Financial Health and Stability

On the surface, CSWC’s profitability metrics look solid, with a profit margin of 33.49% and an operating margin of 87.35%. These figures show that the company operates efficiently, generating strong returns from its portfolio. However, the balance sheet tells a more complicated story.

• Total Cash: $36.01 million
• Total Debt: $925.69 million
• Debt-to-Equity Ratio: 111.47%
• Return on Equity (ROE): 8.57%

While the company is not in immediate financial distress, it is heavily leveraged, which could create challenges if economic conditions worsen. The biggest concern here is the company’s reliance on debt. If borrowing costs rise further, it could eat into profits and make it harder to maintain dividends at their current level.

For BDCs, net investment income is the lifeblood of dividend payments. If CSWC’s earnings don’t keep up with distributions, the company might have to issue new shares to raise capital, diluting existing shareholders.

Valuation and Stock Performance

CSWC currently trades at a price-to-book ratio of 1.37, which is reasonable for a well-managed BDC but slightly higher than some of its peers. The forward price-to-earnings (P/E) ratio of 9.39 suggests that investors are pricing in some level of risk.

• 52-Week High: $27.23
• 52-Week Low: $20.68
• Current Price: $22.46 (March 6, 2025)
• 50-Day Moving Average: $22.52
• 200-Day Moving Average: $24.25

One notable point is that CSWC is currently trading below its 200-day moving average, which suggests recent downward momentum. The stock’s five-year beta of 1.28 means it’s more volatile than the broader market, so price swings are to be expected.

Another interesting observation is that institutional ownership sits at just 31.54%. While this isn’t necessarily a dealbreaker, it’s lower than what’s typically seen in high-quality dividend stocks. A lower percentage of institutional ownership can sometimes indicate a lack of strong confidence from large investors.

Risks and Considerations

Payout Sustainability

A payout ratio above 180% raises red flags. While the company has been able to maintain its dividends so far, continued earnings declines could force adjustments in the future.

Interest Rate Sensitivity

Business development companies rely on lending, and a high-interest rate environment can increase borrowing costs. If rates remain elevated, CSWC may face pressure on its margins.

High Leverage

With a debt-to-equity ratio over 111%, CSWC is operating with a significant amount of leverage. While this is common in the industry, it does add financial risk if credit conditions tighten.

Earnings Volatility

A 30.7% year-over-year drop in earnings is concerning. If earnings don’t stabilize soon, dividend coverage could become a major issue.

Market Volatility and BDC-Specific Risks

BDC stocks can be volatile, especially in uncertain economic conditions. If borrowers start defaulting on their loans, CSWC’s investment income could take a hit, further impacting dividends.

Final Thoughts

Capital Southwest Corporation offers an attractive double-digit dividend yield, making it a tempting choice for income-focused investors. However, a closer look reveals several concerns, including a high payout ratio, declining earnings, and heavy leverage. While the company has a solid history of dividend payments, future sustainability depends on its ability to grow investment income and manage its debt effectively.

For those holding shares, keeping an eye on earnings trends, net investment income growth, and dividend policy updates will be crucial. While CSWC remains a strong player in the BDC space, its ability to maintain its high-yield dividends without significant adjustments remains uncertain.

For income investors, it all comes down to risk tolerance. The current yield is undeniably attractive, but sustainability is the key question.