In Part VIII of our series (here) we discussed several business development companies [BDCs]. The Protected Principal Retirement portfolio has been long only one [BDC] to date - Medley Capital (MCC), and it has performed quite well to date.
With the markets dipping substantially over the past few weeks I think it is pertinent at this time to take a second look at this asset class. We discussed in Part VIII how [BDCs] are quite sensitive to the overall economic condition of the country, and react significantly to changes in interest rates. We can add a third caution - the possibility of increased taxes on dividends beginning in 2013. The exact impact of new taxes has yet to be finalized, and will vary depending upon the structure of a given [BDC].
Wiru the exception of Fifth Street Finance (FSC) which reports on November 28, all of the [BDCs] have reported 3rd quarter earnings.
With more data available we can expand the metrics that we use to evaluate the [BDC] asset class. The following were used to ascertain portfolio candidates:
1. Yield - Ideally in the 8+ percent range.
2. Price/Net Asset Value [NAV] - 1.00 or less.
3. Dividend/Earnings Per Share [EPS] 2013 - 100 percent or less.
4. Earnings Forecast - Increase 2013 over 2012.
5. Five Year Compound Annual Growth Rate [CAGR] - 5 percent or more.
The primary data sources used were found at Yahoo Finance and on iVillage.
Since our [BDC] universe consists of about 30 companies our initial screen was designed to quickly reduce this to a more manageable number. We therefore eliminated all [BDCs] whose price exceeded their NAV. This reduced the list to the following 14:
- Apollo Investment Corporation (AINV) - Price/NAV = 0.91
- BlackRock Kelso Capital Corporation (BKCC) - Price/NAV = 1.00
- Gladstone Investment Corporation (GAIN) - Price/NAV = 0.76
- Gladstone Capital Corporation (GLAD) - Price/NAV = 0.86
- MCG Capital Corporation (MCGC) - Price/NAV = 0.86
- NGP Capital Resources Company (NGPC) - Price/NAV = 0.73
- Prospect Capital Corporation (PSEC) - Price/NAV = 0.95
- Solar Capital Ltd. (SLRC) - Price/NAV = 0.99
- TICC Capital (TICC) - Price/NAV = 0.97
- Tortoise Capital Resources Corp. (TTO) - Price/NAV = 0.78
- Full Circle Capital Corporation (FULL) - Price/NAV = 0.86
- Horizon Technology Finance Corporation (HRZN) - Price/NAV = 0.89
- PennantPark Floating Rate Capital (PFLT) - Price/NAV = 0.90
- Solar Senior Capital Ltd. (SUNS) - Price/NAV = 0.92
Remaining Evaluative Metrics
The surviving [BDCs] were matched against the remaining criteria (Yield, Dividend/EPS, Earnings Forecast, and Five-Year CAGR). The following Table presents the results:
Based upon our evaluation, the following five [BDCs] meet, or exceed our evaluative metrics:
Delving further in the financials of each of these five BDCs, it is worth noting that, of the five, FULL has a return on equity of 58 percent, by far the highest of the group, and revenues have increased by 18 percent year-over-year.
It is worth noting that MCC (our original portfolio pick) did not make this list. It met all of the criteria except for the current price/NAV which is 1.12. Based upon its performance and recent dividend increase, I believe that the recent increase in the share price may have gotten a bit ahead of last quarter's NAV. We therefore, will retain it in the portfolio at least until we can gauge next quarters results.
I continue to put off adding any BDCs to the portfolio until there is some type of resolution (or no resolution) to the coming fiscal cliff.
Should this critical issue be favorably resolved I will seriously consider initiating a position in FULL.