Stellus Capital Investment (NYSE:SCM) versus Morgan Stanley Direct Lending Fund (NYSE:MSDL) Critical Comparison

Morgan Stanley Direct Lending Fund (NYSE:MSDL) and Stellus Capital Investment (NYSE:SCM) are both small-cap finance companies, but which is the superior business? We will contrast the two businesses based on the strength of their institutional ownership, analyst recommendations, valuation, dividends, risk, profitability and earnings.

Analyst Ratings

This is a summary of current ratings and price targets for Morgan Stanley Direct Lending Fund and Stellus Capital Investment, as provided by MarketBeat.

	Sell Ratings	Hold Ratings	Buy Ratings	Strong Buy Ratings	Rating Score
Morgan Stanley Direct Lending Fund	0	6	1	0	2.14
Stellus Capital Investment	1	2	1	0	2.00

Morgan Stanley Direct Lending Fund presently has a consensus price target of $15.50, indicating a potential upside of 18.64%. Stellus Capital Investment has a consensus price target of $9.25, indicating a potential upside of 31.06%. Given Stellus Capital Investment’s higher probable upside, analysts clearly believe Stellus Capital Investment is more favorable than Morgan Stanley Direct Lending Fund.

Valuation and Earnings

This table compares Morgan Stanley Direct Lending Fund and Stellus Capital Investment”s top-line revenue, earnings per share (EPS) and valuation.

	Gross Revenue	Price/Sales Ratio	Net Income	Earnings Per Share	Price/Earnings Ratio
Morgan Stanley Direct Lending Fund	$397.29 million	2.77	$122.09 million	$0.69	18.93
Stellus Capital Investment	$37.09 million	5.42	$27.05 million	$1.02	6.92

Morgan Stanley Direct Lending Fund has higher revenue and earnings than Stellus Capital Investment. Stellus Capital Investment is trading at a lower price-to-earnings ratio than Morgan Stanley Direct Lending Fund, indicating that it is currently the more affordable of the two stocks.

Volatility and Risk

Morgan Stanley Direct Lending Fund has a beta of 0.58, suggesting that its stock price is 42% less volatile than the S&P 500. Comparatively, Stellus Capital Investment has a beta of 0.71, suggesting that its stock price is 29% less volatile than the S&P 500.

Dividends

Morgan Stanley Direct Lending Fund pays an annual dividend of $1.80 per share and has a dividend yield of 13.8%. Stellus Capital Investment pays an annual dividend of $1.00 per share and has a dividend yield of 14.2%. Morgan Stanley Direct Lending Fund pays out 260.9% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Stellus Capital Investment pays out 98.0% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Stellus Capital Investment is clearly the better dividend stock, given its higher yield and lower payout ratio.

Insider and Institutional Ownership

13.2% of Stellus Capital Investment shares are owned by institutional investors. 0.3% of Morgan Stanley Direct Lending Fund shares are owned by insiders. Comparatively, 4.2% of Stellus Capital Investment shares are owned by insiders. Strong institutional ownership is an indication that hedge funds, endowments and large money managers believe a company will outperform the market over the long term.

Profitability

This table compares Morgan Stanley Direct Lending Fund and Stellus Capital Investment’s net margins, return on equity and return on assets.

	Net Margins	Return on Equity	Return on Assets
Morgan Stanley Direct Lending Fund	15.97%	9.61%	4.28%
Stellus Capital Investment	30.66%	9.09%	3.32%

Summary

Stellus Capital Investment beats Morgan Stanley Direct Lending Fund on 9 of the 15 factors compared between the two stocks.

About Morgan Stanley Direct Lending Fund

Morgan Stanley Direct Lending Fund is a business development company. It is a non-diversified, externally managed specialty finance company focused on lending to middle-market companies. Morgan Stanley Direct Lending Fund is based in NEW YORK.

About Stellus Capital Investment

Stellus Capital Investment Corporation is a business development company specializing in investments in private middle-market companies. It invests through first lien, second lien, unitranche, and mezzanine debt financing, often with a corresponding equity investment. The fund prefers to invest in US and Canada. The fund seeks to invest in companies with an EBITDA between $5 million and $50 million.