Capital Southwest (CSWC) Analysis | BDC Stock Breakdown

0:00College football is back. So, Hilton called to me the superstition concierge to make your fan rituals a reality. Need a room to match your lucky number? We got you. Want to make sure our team doesn't wash your lucky jersey? Oh, that smells lucky. Hilton's unmatched hospitality can keep up with any superstition. Even a marching bandwick up call it 555 and 55 seconds. Hit it! When you need a team that will do whatever it takes on game day, it matters where you stay. Hilton, for this day. Welcome to the BDC Stock Breakdown. The show where we examine individual business development companies, look beneath the dividend yield and decide whether the stock deserves a place in a diversified income portfolio. Today, we're covering capital Southwest Corporation ticker symbol, CSWC. Capital Southwest has become one of the more highly regarded BDCs in the market. It often, it offers monthly dividend payments,

1:02operates under an internally managed structure, and has built a portfolio, heavily concentrated in first-learn senior secured loans. However, investors have already rewarded the company with a significant premium valuation. So, is CSWC still worth buying? Or is this an excellent BDC trading at two higher price? Let's break it down. Capital Southwest is a Dallas-based business development company that provides financing to lower middle market businesses. Its typical investments range from approximately $5 million to $50 million. With borrowers generally producing between $3 million and $25 million in EBITDA. Unlike many BDCs, Capital Southwest is internally managed. This means it does not pay an outside manager,

2:03the traditional-based management incentives commonly found throughout the BDC sector. That structure can create better alignment between management and shareholders. Capital Southwest reported operating expenses equal to approximately 1.4% of average assets during its latest fiscal year. Compared with the company's cited BDC industry average of roughly 2.6%. As of March 31, 2026, Capital Southwest managed an investment portfolio valued at approximately $2.1 billion, spread across 131 portfolio companies. That's good. Around 90% of the total portfolio was invested in first-learn loans. When we look specifically at the credit portfolio, approximately 99% was first-learn senior secure debt. That does not eliminate the possibility of losses, but it generally places Capital Southwest

3:04closer to the front of the repayment line when a borrower experience is financial trouble. The portfolio is also relatively granular. The average debt investment represented approximately 0.9% of the credit portfolio, reducing the damage that could be caused by the failure of any single borrower. The weighted average yield on debt investments was 10.8%. Down from 11.3% during the previous quarter, that decline reflects one of the major issues facing BDCs. Falling benchmark interest rates can reduce income from floating rate loans. Credit performance remains relatively healthy, although it is not perfect. Lones on non-accurral status represented, approximately 1.1% of the total portfolio at fair value. Capital Southwest also recorded $7.9 million in net depreciation across its credit investments

4:06during the latest quarter. Those figures are not alarming by themselves, but investors should continue watching whether we could credits, begin moving into the company's higher risk internal rating categories. College football is back, so Hilton called in me the superstition concierge to make your fan rituals a reality. Need a room to match your lucky number? We got you, wanna make sure our team doesn't wash your lucky, Jersey? Oh, that smells lucky. Hilton's unmatched hospitality can keep up with any superstition, even a marching bandwinkup call it 555 and 55 seconds. Hit it! When you need a team that will do whatever it takes on game day, it matters where you stay. Hilton, for this day. Now for the earnings and the dividend. For the quarter-ending March 31st to 2026, capital Southwest generated pre-tax net investment income of $35.2 million or 59 cents per share.

5:08The company's regular quarterly dividend was 58 cents per share, meaning quarterly pre-tax net investment income narrowly covered the regular distribution. Capital Southwest also paid a supplemental dividend of six cents, bringing the total quarterly distribution to 64 cents. Over the full fiscal year, the company generated $2.39 per share of pre-tax net investment income while paying $2.32 in regular dividends. That indicates the regular dividend was covered by recurring net investment income. Although the supplemental payments require additional taxable income, realize gains are previously retained income. Fortunately, capital Southwest reported approximately $1.7 per share of undistributed taxable income. That reserve gives management additional flexibility to maintain supplemental distributions

6:10when quarterly earnings fluctuate. For July, August and September, 2026, the company declared monthly regular dividends of approximately $19.34 per share, plus another six cents, a supplemental dividend payable in September. At the recent share price of roughly $23.95, the regular dividend produces an annualized yield of approximately 9.7%. Including the current supplemental dividend rate. The indicated yield rises at approximately 10.7% in my apologies, at approximately 10.7%. I gotta give a stats right. Investors should remember that supplemental dividends are not guaranteed and could be reduced if investment income or realized gains somehow decline. Capital Southwest grew its portfolio by approximately 17%

7:12during fiscal 2026, increasing investments at fair value from roughly $1.8 billion to $2.1 billion. The company originated more than $762 million in new commitments during the year. While total investment income increased by 13.5% to $232.1 million. Its regulatory debt-to-equity ratio stood at 0.90, which appears manageable for a BDC. Capital Southwest also had approximately $364 million of unused credit facility capacity. Along with additional available SBA backed financing. The company has also established a joint venture with Trinity Capital called CapTrin. I love that name, CapTrin. It's just CapTrin partners.

8:13That platform could provide another source of portfolio growth while allowing capital Southwest to compete, to compete, sorry, compete for additional first out senior secured lending opportunities. Now let's go over the risks in valuation. The biggest risk may not be capital Southwest operations. It may be the stock's valuation. With shares recently trading around $23.95 and reported net asset value at $16.69 per share, CSWC trades at approximately a 43% premium to nav. Premium valuations can be helpful because capital Southwest can issue new shares above book value, raising capital in a way that is a credit, I always say, this word is so, I always love this word,

9:14a credit to existing shareholders. It's such a simple word, but sometimes it tips my tongue, ew, whatever. Anyway, during the latest quarter, the company sold shares at an above, at an average price of $23.13, or approximately 138% of the prevailing nav. But a high premium also creates downside risk. Even if nav remains stable, the share price could fall sharply if investors decide that CSWC no longer deserves such an expensive valuation. Interest rates or another risk. Approximately 95.5% of credit portfolio carries floating rates. Capital Southwest estimates that a 75 basis point decline in benchmark rates could reduce annual net investment income by approximately 70, not 79, ew, at approximately 19 cents per share

10:15before considering future originations or other portfolio changes. Now my final rating after weighing the dividend, portfolio quality internal management structure, credit performance and valuation, I give capital Southwest corporation a solid 8.2 out of 10, once again, 8.2 out of 10. CSWC is one of the stronger BDCs I have reviewed. The regular dividend support is supported by investment income. The portfolio is dominated by first lien loans and internal management gives the company a meaningful structural advantage. The reason it does not score closer to a nine is valuation. Paying more than 40% above nav leaves investors with less margin of safety. Especially if interest rates continue declining or credit losses increase. For existing shareholders, CSWC looks like a strong income

11:19producing holding. For new investors, it may make sense to build a position gradually rather than chasing the shares at any price. This analysis is for informational purposes and is not financial advice. Always do your own research. Talk to a financial advisor. I do this for the love of the game for educational entertainment purposes only, not financial advice. But let me know what your rating is for Capital Southwest in the comments below. Subscribe for more episodes of the BDC stock breakdown. I hope you guys enjoyed this show. I enjoy making these shows. I really do. Hope you all have an incredible rest of the day. Booking.com is the easiest way from a day surrounded by noise. To a state surrounded by nature. That's nice.

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