I own 5 Business Development Company (BDC's) that offer compelling, consistent and growing dividend yields based on solid business fundamentals. BDC shares can, during turbulent market conditions, have volatile prices. I own these with a tight leash. They provide high yield income in a low interest rate environment. Yields for the five companies listed below range from 5.4% to 11.7%. Each name has 4 or more years of consistent dividend payment backed by periodic increases.
A Business Development Company (BDC) is a publicly traded firm that uses its capital to invest in small and medium businesses, essentially acting as a private equity firm. BDC's are designed to give individual investors protected access to potentially lucrative private equity market transactions while containing risks through limits on the amount of debt they may take on, through in-house compliance mandates and through transparency-promoting quarterly, annual and proxy filings with the Securities and Exchange Commission so public investors are in on the company's investments, financial risk and well-being.
Prospect Capital Corp. (PSEC)
Prospect Capital is a BDC that provides equity and debt financing to private and public mid-market companies, primarily in the energy and industrial sector, for acquisitions, capital projects, restructurings, management buyouts and growth. Transactions are structured to provide current income (such as interest from debt), capital appreciation (through equity, convertible or mezzanine securities) and capital protection (through investments in stable, predictable cash flow projects).
Current Dividend Yield: 11.7%
Prospect has consistently paid dividends since 2004. Prospect currently pays a monthly dividend of $0.1101, with the next payment due March 21, 2013. With annualized dividends of $1.3212 and with shares trading at about $11, Prospect offers a rather compelling dividend yield of over 11% with shares reasonably priced at 8x earnings and a market capitalization of $2.5 billion that is only 10% higher than the fair market value of its Net Assets.
On March 8, 2013, Prospect conducted a public offering where it sold $250 million of 5.875% 10-year senior unsecured notes, maturing in March 2023, with semi-annual interest payable. Proceeds will be invested in high-quality short-term debt and subsequently used for investments.
Also in March, Prospect gave Cinedigm Digital Cinema Corporation a $70 million long-term loan to help with the recapitalization of its subsidiaries.
Prospect recently announced outstanding quarterly results. For its second quarter ended December 31, 2012, Prospect saw total investment income increase 154% to $116.9 million from $46.1 million in a year ago quarter. Total expenses grew at a much lower rate, up 117% to $66.8 million from $30.8 million. As a result, net investment income was up 172% to $99.2 million in the quarter from $36.5 million in the year-ago quarter.
The company realized a loss of $8.1 million on its investments and reported unrealized depreciation on investments of $44.6 million.
Triangle Capital Corp. (TCAP)
Triangle Capital Corp. is a BDC that primarily invests $5 - $15 million in subordinated secured and senior secured debt of lower middle market companies, with specialized custom financing structures and equity components for capital appreciation upside to supplement interest income.
Current Dividend Yield: 7.4% Yield
Triangle has consistently paid quarterly dividends since its IPO in February 2007, consecutively over the past 25 quarters. And Triangle recently raised dividends 14.9% year-over-year to $0.54 per share (payable March 27, 2013), its fourth consecutive quarterly increase.
With annualized dividends of $2.16 per share and with shares trading at about $29, Triangle offers a dividend yield of about 7.50% with a price-to-earnings ratio of about 13x and a market capitalization of about $800 million (almost 2-times Net Assets).
In February 2012, Triangle publicly sold 4.3 million common shares at $19 each and raised $77 million for investments and, secondarily, for general working capital.
In December 2012, Triangle invested $16 million in Comverge Inc., as a combination of subordinated debt and equity. Comverge provides energy management solutions to commercial and industrial organizations to help maximize profit and efficiency. In total, the company made 26 new investments in 2012.
For its fourth quarter ended December 31, 2012, Triangle reported a 36% increase in total investment income to $25 million from $18.3 million in the year-ago quarter, primarily from higher loan interest, fees, dividends and payment-in-kind interest. Net investment income was up 30% to $18.1 million (57¢ per share).
For the full year, total investment income jumped 42% to $90.4 million from $63.4 million in 2011, on a broader income generating portfolio.
At year end, Triangle had total investments of $707 million, up from $507 million, cash of $72 million, total debt of 363 million (up from $224 million) and net assets of $417.3 million, up 25% from $334.3 million at year end 2011.
Main Street Capital Corp. (MAIN)
Main Street Capital provides customized debt capital to mature lower-middle-market companies for acquisitions, restructuring, capital projects and growth. Main Street also advises portfolio companies on strategy, operations and corporate finance.
Current Dividend Yield: 5.4% Yield
Main Street has regularly paid, and periodically raised, dividends since its October 2007 IPO. Main Street recently announced an 11% annual increase in quarterly dividends. The company plans to pay a monthly dividend of $0.155 per share or $0.465 for its second quarter ending June 30, 2013. With projected annual dividends of $1.86 and shares trading at about $34 (up from a 52-week low of $21.75), the company offers a dividend yield of about 5.40%, a price-to-earnings ratio of about 9.5x and a market capitalization of $1.2 billion (almost 2-times Net Assets).
In January 2013, Main Street invested $40.5 million in Quality Lease and Rental Holdings, LLC, split as $38 million in senior secured debt and $2.5 million in equity. Quality provides drill site services and rental equipment for the upstream oil and gas industry.
For its fourth quarter ended December 31, 2012, Main Street total investment income increased 33% to $26.2 million from $19.7 million in the year-ago quarter. Total expenses grew at a lower rate, up 3.8% to $8.04 million. As a result, net investment income was $18.1 million, or $0.56 per share. Net assets increased 13.6% by $24.5 million ($0.76 per share) in the quarter.
For the full year, total investment income was up 37% to $90.5 million from $66.2 million. In 2012, Main Street completed $150.7 million in lower middle market (LLM) investments, bringing its portfolio to 59 LLM companies. In 2012, net assets increased $104.4 million ($2.01 per share).
As of December 31, 2012, Main Street's investment portfolio was valued at $924.4 million, up from $658 million a year ago. The company had cash of $63.5 million, debt of about $343 million and net assets of $643 million ($18.59 per share).
THL Credit, Inc. (TCRD)
THL Credit, Inc., invests in private subordinated debt, preferred stock, warrants and equity in middle market companies with revenues of $25 - $500 million.
Current Dividend Yield: 8.6%
THL recently announced a quarterly dividend of $0.33 per share for its first quarter of 2013, payable March 29, 2013. With annualized dividends of $1.32 per share and with shares trading at about $15 (versus a 52-week low of $12.20), the company offers a dividend yield of about 8.60% with a price-to-earnings ratio of 12 and a market capitalization of slightly over $400 million (15% above Net Assets).
In January 2013, THL announced its participation in five new investment deals tied to recapitalizations, refinancing, acquisitions and growth investments.
For its fourth quarter ended December 31, 2012, THL saw total investment income increase 50% to $16.4 million (mostly from interest income on loans made) from $10.9 million in the year ago quarter. Total expenses were up 38% to $6.8 million and net investment income was $9 million ($0.34 per share).
For the full year, total investment income jumped 37% to $53.1 million from $37.4 million in 2011 and net investment income was $30.2 million ($1.38 per share). Net assets increased $27.6 million in the year.
At year end, THL had total investments of $394.3 million (up from $267 million a year ago) and cash of $4.8 million. THL repaid $140 million to its credit facility and ended the year with $50 million in loans payable. The company had total net assets of $347.5 million ($13.20 per share).
KCAP Financial, Inc. (KCAP)
KCAP Financial (aka Kohlberg Capital Corp.) is a BDC that focuses on middle market debt, hybrid and equity investments, and on asset management through two subsidiaries - Katonah Debt Advisors and Trimaran Advisors - that invest in high yield debt, syndicated loans and other credit securities. KCAP Financial is associated with legendary private equity firm Kohlberg & Co. of KKR fame.
Current Dividend Yield: 10.6%
KCAP recently paid a quarterly dividend of $0.28 per share. At $1.12 annualized and with shares trading at about $10.50 (up from a 52-week low of $5.51), KCAP shares offers an enticing dividend yield of 10.50%, albeit with a high price-to-earnings ratio of 37x and a market capitalization of $280 million (1.37x Net Assets).
Last month, KCAP priced its public offering of 4.75 million shares of common stock at $9.75 per share, with an overallotment option of 682,500 shares. KCAP hopes to raise $50 million through this offering which it will use for investments and general corporate expenses.
For its last quarter ended September 30, 2013, KCAP saw total investment income increase 42.5% to $10.4 million from $7.3 million in the year ago quarter. Total expenses remained flat at $3.2 million and net investment income was $7.1 million, up from $4.1 million in the year-ago quarter. In the quarter, net assets increased $9.4 million ($0.32 per share, diluted).
KCAPs portfolio grew 19.8% to $290 million from $242 million at the end of calendar 2011. The company had total assets of $303 million, borrowings of $88 million and stockholders' equity of $207 million, up from $180.5 million at the end of 2011.
Overall, BDC's manage leverage rather well and receive stable interest income from investments in small companies that pay high interest, with capital appreciation upside from selective and favorable equity participation. BDC's are not risk free. Continual monitoring is required to review the status of balance sheet warrant ownership, equity ownership, secured and unsecured debt. Management is crucial in analyzing the right clientele for business involvement.