Analyzing Morgan Stanley Direct Lending Fund (NYSE:MSDL) & Stellus Capital Investment (NYSE:SCM)

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

Institutional & Insider Ownership

13.2% of Stellus Capital Investment shares are held by institutional investors. 0.3% of Morgan Stanley Direct Lending Fund shares are held by company insiders. Comparatively, 4.2% of Stellus Capital Investment shares are held by company insiders. Strong institutional ownership is an indication that endowments, hedge funds and large money managers believe a company is poised for long-term growth.

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%

Dividends

Morgan Stanley Direct Lending Fund pays an annual dividend of $1.80 per share and has a dividend yield of 13.6%. Stellus Capital Investment pays an annual dividend of $1.00 per share and has a dividend yield of 14.7%. 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.

Earnings & Valuation

This table compares Morgan Stanley Direct Lending Fund and Stellus Capital Investment”s revenue, earnings per share and valuation.

	Gross Revenue	Price/Sales Ratio	Net Income	Earnings Per Share	Price/Earnings Ratio
Morgan Stanley Direct Lending Fund	$397.29 million	2.81	$122.09 million	$0.69	19.21
Stellus Capital Investment	$102.14 million	1.90	$27.05 million	$1.02	6.68

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.

Analyst Ratings

This is a summary of current recommendations and price targets for Morgan Stanley Direct Lending Fund and Stellus Capital Investment, as reported 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 target price of $15.17, suggesting a potential upside of 14.42%. Stellus Capital Investment has a consensus target price of $9.25, suggesting a potential upside of 35.83%. Given Stellus Capital Investment’s higher possible upside, analysts clearly believe Stellus Capital Investment is more favorable than Morgan Stanley Direct Lending Fund.

Volatility & Risk

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

Summary

Stellus Capital Investment beats Morgan Stanley Direct Lending Fund on 8 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.