Protected Principal Retirement Strategy: Updating Our BDC Positions

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Includes: MCC, PSEC, TICC
by: Akaralph

Over the past several months we have made some additions to the Protected Principal Retirement Strategy portfolio in the business development company [BDC] sector.

My previous article (here) addressed the performance of our energy investments, and in this article I will provide an update to our BDCs.

I believe that this asset class in the right market environment can offer solid total returns; however, I have exercised extreme care in establishing, and/or adding to positions since the markets have been gravitating into overbought territory.

The portfolio currently holds three positions in this sector: Prospect Capital Corporation (NASDAQ:PSEC), Medley Capital Corporation (NYSE:MCC), and TICC Capital Corporation (NASDAQ:TICC). The following presents an update on how these stocks have performed since becoming a part of the Protected Principal Retirement Strategy portfolio.

Prospect Capital - I continue to believe that is one of the brightest spots in the BDC sector. At current price levels it yields about 11.8 percent and the monthly dividend is increasing. Looking at 2013 earnings estimates, the dividend to earnings per share ratio is presently 89 percent so there is adequate coverage, and the price to net asset value ratio is just over 1.00.

Medley Capital Corporation - Medley was the first BDC we purchased for the portfolio several months ago. At the time of purchase all of its financial metrics were well within the range of our criteria. Medley has increased its quarterly dividend from $.31 to $.36 since our purchase, and at current prices yields 9.4 percent. Using 2013 earnings estimates we note that the dividend-to-earnings ratio is anticipated to be 99 percent, and the price to net asset value is at 1.21 (high enough to warrant some caution relative to future purchases).

TICC Capital - Our other BDC position, has performed well for us, and the dividend has increased from $.27 to $.29 per quarter. I am a bit concerned as to whether earnings for the quarter ending December 2012 will afford adequate coverage of the $.29 dividend. At current levels, it yields 11 percent. Looking at present metrics we note that based upon 2013 earnings forecasts, it has a dividend to earnings ratio of 95 percent. The price to net asset ratio is 1.07.

The Table that follows presents a summary of the performance of our portfolio BDCs.

BDC Buy Price Current Price Profit/(Loss)
PSEC $10.90 $11.26 +3.3%
MCC $12.76 $15.38 +20.5%
TICC $9.76 $10.45 +7.1%
Click to enlarge

Summary

While I continue to favor BDCs on an intermediate-term basis, I remain concerned that this asset class is extremely sensitive to both inflation and to interest rates. I would also note that the ratios of price to net asset value are increasing, but this is less of an immediate concern as it seems to be true of the BDC sector as a whole.

Disclosure: I am long PSEC, MCC, TICC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article does not constitute either a buy or sell recommendation for any of the stocks mentioned.