Business Development Companies (BDCS) lend to small and mid-sized businesses, with limited financial leverage, paying out most of their income to investors and paying little to no corporate tax.
These are the five general criteria I use to evaluate BDCs:
- Profitability (EPS to cover dividends, growth)
- Risk (diversification, volatility, leverage)
- Payout (sustainable, consistent, growing)
- Analyst Opinions
- Valuation (P/E, PEG, NAV)
For more information about BDCs, how I evaluate them, and my BDC investment philosophy, please see this article.
Below is an oversimplified table evaluating the companies I have reviewed among a universe of 30 BDCs giving them a relative score between 0 and 10 (10 being the best). In reality I use different weightings for almost 100 data points on each company and my personal rankings (based on my risk/return comfort) are close to these but far from exact. In future articles I will add the new companies to this table as well as update info.
- Market Cap: $199 million
- Div Yield: 8.9%
- Div/EPS: 91%
- P/E: 10.2
- Price/NAV: 1.03
- Debt/Equity: 0.50
- January 8 - announced dividends of $0.07 per share for January, February and March 2013.
GLAD is one of the "older" BDCs with lower growth rates and less actively trying to grow its portfolio through equity/debt offerings than most. The quarterly net investment income averages near $0.23 per share over the last two years adequately covering its stagnant yet consistent dividend of $0.21 per share. Analysts are projecting little to no growth through 2014.
As of December 31, 2012, the portfolio was invested in 48 companies and totaled $271 million at fair value with a better than average industry diversification (see chart below).
When interest and/or principal payments on a loan become past due, or if the borrower is not expected to be able to service its debt and other obligations, loans are placed on non-accrual status. As discussed in previous articles, some BDCs have higher non-accruals like GLAD, American Capital (ACAS), Prospect Capital (PSEC), KCAP Financial (KCAP), and MCG Capital (MCGC). Below is a chart from the Triangle Capital (TCAP) November 2012 investor presentation showing non-accruals as a percent of portfolio as of November 2012.
As of December 31, 2012, GLAD had four portfolio companies that were on non-accrual with an aggregate debt cost basis of approximately $56.6 million, or 16.4% of the cost basis of all debt investments in its portfolio.
The debt to equity ratio of 0.5 is lower than average and volatility ratios are higher than most BDCs, with poor performance during down markets.
The current dividend yield of 8.9% is average, but with zero historical and projected growth in EPS, and no dividend increases over the last 7 years there is little hope for increase in the near future.
Most analysts rate GLAD between a "Hold" and a "Sell" with target prices between $8 and $9.
GLAD is currently trading at a 3% premium to book value and the P/E of 10.2 which are both below average, but with zero projected growth the PEG is high.
I would consider GLAD at the low end of the "Maybe" category of BDCs as long as it is able to pay its dividend with net investment income. The risk profile , history of high non-accruals and volatility ratios are red flags. There are many BDCs offering higher returns, hopefully with lower risk.
- Part 16 - Fidus Investment (FDUS)
- Part 15 - Horizon Technology Finance (HRZN)
- Part 14 - TICC Capital (TICC)
- Part 13 - TCP Capital (TCPC)
- Part 12 - Triangle Capital
- Part 11 - New Mountain Finance (NMFC)
- Part 10 - THL Credit (TCRD)
- Part 9 - Golub Capital (GBDC)
- Part 8 - KCAP Financial
- Part 7 - Ares Capital (ARCC)
- Part 6 - Hercules Technology Growth Capital (HTGC)
- Part 5 - Solar Capital (SLRC)
- Part 4 - PennantPark Investment (PNNT)
- Part 3 - Apollo Investment (AINV)
- Part 2 - Prospect Capital , BlackRock Kelso Capital (BKCC) and Main Street Capital (MAIN)
- Part 1 - Medley Capital (MCC), MCG Capital and Fifth Street Finance (FSC).