This article focuses on Full Circle Capital (FULL) and compares it to the 22 BDCs covered in my previous articles. Please visit bdcbuzz.blogspot.com for updated info or see the list of previous BDCs covered at the end.
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.
Full Circle Capital
- Market Cap: $59 million
- Div Yield: 11.9%
- Div/EPS: 105%
- P/E: 10.0
- Price/NAV: 0.96
- Debt/Equity: 0.33
- November 30 - completed a follow-on public offering of 1,350,000 shares for gross proceeds of approximately $10.7 million.
FULL is another one of the 'newer' BDCs as well as one of the smallest with a market capitalization of less than $60 million. My primary concern is whether dividends are covered by net investment especially if the NAV continues to decline over time. FULL has yet to cover its dividends but in the most recent quarter it reported EPS of $0.22 almost covering its dividend of $0.23. Analysts are projecting little to no growth through 2014.
As of December 31, 2012, its portfolio consisted of 21 companies and was invested 88% in senior secured loans, 4% in subordinated loans, and 8% in equityand warrants. Floating rate loans accounted for 84% of the debt. FULL has a less than average industry diversification with little to no energy or technology, and a disproportionate amount in consumer discretionary (see chart below).
FULL has one of the lowest debt to equity ratios at 0.33 and since it is relatively new, determining volatility ratios and down market performance is difficult.
The current dividend yield of 11.9% is much higher than the average and is only surpassed by Prospect Capital (PSEC) currently at 12.0%. However it has only increased dividends once since its IPO and until net investment income can support, future increases will most likely be limited and hopefully not cut.
Given the small size of FULL there is less analyst coverage than most BDCs but the ones that do cover rate it between a "Sell" and a "Hold" with a target price of $7.50.
FULL is currently trading at a 4% discount to book value which is lower than average, with only a handful of BDC priced below NAV such as MCG Capital (MCGC) with a 7% discount and American Capital (ACAS) with a 17% discount. The low price to book ratio is probably due to the constant quarterly decrease in NAV which is a major concern. The current P/E of 10.0 is also lower than average but probably due to the low projected EPS growth rates.
There have been a few recent articles on SA regarding FULL like Factoids "Full Circle Capital's Q4-12 Earnings And Valuations: Does It Belong In Your Portfolio?" and most come to the same conclusions. The high dividend yield and low valuation multiples are attractive but come with concerns including the lack of dividend coverage by net investment income, small market capitalization and thin trading, declining book value, and low projected growth rates or dividend increases, I would consider FULL one of "The Bad" BDCs.
- Part 18 - Solar Senior Capital (SUNS)
- Part 17 - Gladstone Capital (GLAD)
- 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 (TCAP)
- Part 11 - New Mountain Finance (NMFC)
- Part 10 - THL Credit (TCRD)
- Part 9 - Golub Capital (GBDC)
- Part 8 - KCAP Financial (KCAP)
- 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).