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This update will provide two spreadsheets on the current sector valuations and the valuations for Golub Capital (NASDAQ:GBDC) and make judgments as to whether GBDC is a buy, sell or hold. In part one I provided the metric details of the calendar Q4-12 GBDC earnings release and 10-Q. I also provided a top down projection of 2013 Total and Net Investment Income (the TII and NII).

The key points from part one:

1 Total Investment Income is rising fast along with TII per share.

2 Net Investment Income per share is rising at a moderate pace.

3 My top down Net Investment Income projection is in line with analyst projections.

4 The portfolio is morphing slowly from a low risk one towards a moderate risk one.

5 GBDC uses SBA and CLO debt to produce a much lower than average percentage cost of debt capital. But with an atypically high debt to Net Assets Value ratio, the total cost of debt to Total Investment Income ratio is high.

BDC Performance and Valuation Spreadsheets

BDCs 04-17-13

Yield in the spreadsheet below is based on the Q1-13 dividend. Spreadsheet header abbreviations: Div = dividend; EPS = earnings per share; LTM = last twelve months; YTD = year to date. The dividend to EPS ratio is a measure of dividend safety. The dividend to NAV ratio is a measure of safety and efficiency. The last four columns measure the percentage change in the 2013 EPS projection and the change in the price target since the beginning of the year; the change in the Q1-13 dividend from the Q1-12 dividend; and the change in the Q4-12 NAV from the Q4-11 NAV. Some BDCs have already started declaring Q2-13 dividends. KED and MAIN are the only BDCs to declare an increase in their Q2-13 dividend.


Share Price Div/Div/Q4-12PriceYTD Percent ChangeLTMLTM
Company1-0104-17YieldEPSNAVNAVNAVPricePr+DivEPSTargetDivNAV

American CapACAS12.0213.900.000.00.017.840.7815.6415.648.5717.89na28.62
Apollo InvestAINV8.368.119.8696.49.88.141.00-2.991.79-5.686.64-28.57-0.25
Ares CapitalARCC17.5016.908.9992.79.516.041.05-3.43-1.26-1.202.962.704.56
BlackRockBKCC10.069.3011.18108.311.29.311.00-7.55-2.39-4.953.340.00-2.82
Fidus InvestFDUS16.4517.658.6191.69.915.321.157.299.60-2.9210.8111.762.82
Fifth StFSC10.4210.3911.06101.711.69.881.05-0.292.471.800.900.00-0.10
Full CircleFULL7.437.8211.82114.111.58.030.975.258.360.000.000.00-9.98
Gladstone InvGAIN6.967.258.2898.46.98.650.844.176.3210.91-11.110.00-9.71
Golub CapGBDC15.9816.077.9799.28.714.661.100.562.570.78-2.470.000.89
Gladstone CapGLAD8.169.069.2798.89.19.190.9911.0313.60-1.16-1.330.00-7.17
HorizonHRZN14.9213.3910.3194.59.115.150.88-10.25-7.94-3.95-3.79-23.33-10.30
HerculesHTGC11.1311.758.5190.910.39.751.215.577.820.929.778.70-0.81
Kayne AndKED24.4425.416.7781.97.223.741.073.975.739.383.8010.263.17
KohlbergKCAP9.199.839.7790.612.27.851.256.969.583.9211.8933.330.00
Main St.MAIN30.5129.276.1587.49.718.591.57-4.06-2.590.989.6211.1122.38
Medley CapMCC14.5614.2110.1396.011.312.691.12-2.400.073.457.4428.570.95
MCG CapitalMCGC4.604.6810.68106.49.75.180.901.744.462.172.59-26.47-8.32
New MountainNMFC14.9013.859.8298.69.714.060.99-7.05-4.771.470.006.253.38
NGP CapitalNGPC7.226.589.7397.06.79.570.69-8.86-4.43-15.38-3.33-11.113.35
ProspectPSEC10.8710.4612.6285.712.210.810.97-3.77-0.743.366.658.721.12
Pennant FloatPFLT12.7014.137.4389.77.513.991.0111.2613.336.365.3616.672.27
Pennant CapPNNT10.9910.6710.50100.910.810.381.03-2.912.18-1.772.480.002.06
SaratogaSAR15.4016.920.000.00.021.750.789.879.87-2.110.00na-10.57
Solar CapSLRC23.9122.6510.6099.611.620.701.09-5.27-0.25-6.233.770.00-5.99
Solar SeniorSUNS18.6618.587.59108.57.718.331.01-0.432.03-8.452.6330.562.00
MedallionTAXI11.7413.346.6077.98.89.991.3413.6315.506.6015.0410.003.20
Triangle CapTCAP25.4926.258.2393.514.115.301.722.985.102.2118.3114.894.22
THL CreditTCRD14.7914.169.3293.610.013.201.07-4.26-2.03-1.406.8213.79-0.30
TICC CapTICC10.129.2712.5199.111.79.880.94-8.40-5.53-4.10-0.187.416.24

Sector Average 9.4296.010.0 1.050.973.590.124.36

With the 10 Treasury at 1.81% and sector average yield (on Q1 dividends) at 9.42% - the spread is 761 bps.
The cap weighted ETF BDCS is up -1.83% year to date - with dividends its total return is 1.89%.
Sector yield, Dividend/NAV and Dividend/EPS ratio filter out the zero payout ACAS and SAR.
Weeding out ACAS and SAR, the average share price gain is 0.09%.

BDC Earnings Growth & P/E Ratios 04-17

Fiscal and calendar years are not in sync. BDCs than began fiscal 2013 on or before calendar Q3-12 include AINV, FULL, GAIN, GBDC, GLAD, MCC, PSEC, PFLT, and PNNT. The range metric is the high estimate minus the low estimate, with that result dividend by the consensus estimate - and serves as one of several measurements for assessing risk. That average is currently inflated by almost 300 bps due to atypical spreads in the projections for ACAS and GAIN. With the exception of KED, all EPS projections are from Yahoo Finance.


Earnings / ShareEarn. GrowthP/E Ratios13 EPS Range
Co.200820092010201120122013201411-1212-1313-14201220132014HighLowRange

ACAS24261621261161141.23-7.94%-1.72%7.89%11.9812.1911.301249228.07%
AINV1801481269988830.85-11.11%-5.68%2.41%9.229.779.5485797.23%
ARCC1421281321561651641.705.77%-0.61%3.66%10.2410.309.9418715618.90%
BKCC176139101100100961.000.00%-4.00%4.17%9.309.699.30101938.33%
FDUS0001631541661.82-5.52%7.79%9.64%11.4610.639.701731607.83%
FSC130127951011071131.165.94%5.61%2.65%9.719.198.9612210713.27%
FULL0008478810.81-7.14%3.85%0.00%10.039.659.6581810.00%
GAIN7962487362610.61-15.07%-1.61%0.00%11.6911.8911.89622265.57%
GBDC0001161151291.39-0.86%12.17%7.75%13.9712.4611.561291271.55%
GLAD135100848891850.893.41%-6.59%4.71%9.9610.6610.18927816.47%
HRZN0001501411461.54-6.00%3.55%5.48%9.509.178.6916812330.82%
HTGC1231258091971101.246.59%13.40%12.73%12.1110.689.4811810710.00%
KED1351271251361892102.2738.97%11.11%8.10%13.4412.1011.192102100.00%
KCAP1501045370891061.0927.14%19.10%2.83%11.049.279.021129714.15%
MAIN115901001692012062.2118.93%2.49%7.28%14.5614.2113.2421619311.17%
MCC000561251501.57123.21%20.00%4.67%11.379.479.0516014410.67%
MCGC9360605325470.54-52.83%88.00%14.89%18.729.968.67504217.02%
NMFC000561351381.40141.07%2.22%1.45%10.2610.049.891401362.90%
NGPC7957547355660.72-24.66%20.00%9.09%11.969.979.14745824.24%
PSEC1911871091091631541.2949.54%-5.52%-16.23%6.426.798.111591459.09%
PFLT00051011171.161920.00%15.84%-0.85%13.9912.0812.181221119.40%
PNNT881091091251081111.16-13.60%2.78%4.50%9.889.619.201151059.01%
SAR130016404572151861861.86-13.49%0.00%0.00%9.109.109.101861860.00%
SLRC02002082252202412.58-2.22%9.55%7.05%10.309.408.782512279.96%
SUNS000631311301.43107.94%-0.76%10.00%14.1814.2912.9914011717.69%
TAXI8656641011211131.1819.80%-6.61%4.42%11.0211.8111.311161087.08%
TCAP1541611582062162312.454.85%6.94%6.06%12.1511.3610.7124921614.29%
TCRD0001041381411.5032.69%2.17%6.38%10.2610.049.4415013510.64%
TICC914989941121171.1819.15%4.46%0.85%8.287.927.8613211316.24%

BDC Average 81.547.514.5411.2510.4710.00 13.50

Next I will build a short-term CAGR (Compound Annual Growth Rate) projection for the dividend. Q1-12 over Q1-11 dividend growth was zero and Q1-13 over Q1-12 growth zero. There has been no dividend growth since Q1-11. For the NII, growth was (1.15/1.15) zero in 2012, and is projected to grow (1.29/1.15) 12.17% in 2013 and (1.39/1.29) 7.75% in 2014. There is no room in the Dividend to analyst projected NII ratio (1.28/1.29) for dividend growth to exceed NII growth in 2013. For 2014, even using the analyst projection, there can be dividend growth. For NAV, 2012 growth was (14.66/14.53) 0.89%. The consensus analyst five year forward CAGR found at Yahoo Finance is 8.0%. I believe this to be another example of overly optimistic analyst CAGR projections.

I have a history of using the formula from the DDM (Dividend Discount Model) to solve for a price implied CAGR. I have almost five years of history using this metric in the creation of CAGR projections for consumer staple stocks and MLPs. But I have also had the needed few years of tweaking the formula in those sectors. For example, it required setting up a two stage CAGR model - with the second stage having slower distribution growth - before the MLP DDM began the output meaningful data. I am still using a one stage model for BDCs - and that could easily prove to be an error. My main purpose for generating this metric is to use it to "buy the big spreads" when they occur between the price implied CAGR and my projected CAGR. The "market's voice" merits being one of my inputs into the creation of my own CAGR projection. My current market price implied CAGR for GBDC is 1.33%. That number is more in line with NAV growth. The output of this "formula method" is producing has the appearance of valid projections.

The current EPS projections for 2013 and 2014 could lead one to a bullish CAGR projection in the mid single digits starting in 2014. I am going to be conservative and give GBDC a 1.5% CAGR projection that is in line with its NAV growth. In a mostly steady interest rate environment, unless a BDC dramatically changes its portfolio components, dividend growth will tend to align with NAV growth. My conservative CAGR projection is still more bullish than the one done by BDC Buzz in his update from early March.

Now let us talk about risk. GBDC had an 8% fall in its EPS projection during 2012. That was worse than the sector average. GBDC has had a 0.78% growth in its projection during 2013, which is better than average. With a spread of 2013 EPS projections (high estimate minus low, with that result divided by the consensus) at 1.56%, the spread indicates well below average risk. The portfolio debt/EBITDA and interest coverage ratio metrics are not provided - and that warrants a demerit. The weighted average yield is 11.2% - which suggests below average portfolio risk.

With GBDC's debt/NAV at 106.68%, its leverage indicates well above average risk on that attribute. The GBDC credit facility has a cost of LIBOR + 2.25% until October 21st of this year. After October, the cost will be LIBOR + 2.75%. This higher than average cost is also an indicator of higher than average risk. I believe that the high facility cost is related to GBDC's high use of leverage. So it may be a redundant indicator that GBDC's leverage is high. But the facility cost indicator is a needed redundancy. The credit rating on publicly traded debt and the yield on that debt are other redundancies.

The GBDC portfolio is 79.7% in secured debt and one stop loans - which indicates below average risk. GBDC has 1.1% of loans at cost on non-accrual - which indicates average risk. With investments in 129 portfolio companies, the GBDC portfolio scores well on granularity or diversification - this indicates lower than average risk.

In sum, GBDC is a slightly lower risk BDC. The risk qualities of GBDC should produce a below average "yield plus CAGR." With a current 7.97% yield and a 1.5% CAGR, the yield plus CAGR is 9.47%. Even with below average risk, that is a low yield plus CAGR. I believe that GBDC needs a 2.5% CAGR projection to justify its current valuations.

Summary - The attributes I want most in a BDC are [1] a well covered divided; [2] growing NII/share; [3] growing NAV/share; [4] a growing dividend/share; [5] metric attributes that make it safer than average; and [6] a long history of superior performance. GBDC is a new-ish BDC with anemic dividend growth and anemic NAV growth. But there is reason to be bullish about NII or EPS growth, which should lead to some dividend growth. GBDC does currently score well on the safety attribute. But I want portfolio debt/EBITDA and interest coverage ratio metrics to have greater faith in my safety assessment. Good BDCs provide that transparency. And there is some evidence that GBDC is morphing away from its prior safety level with recent portfolio changes.

The GBDC yield is well below the sector average. With the safest BDCs (PFLT and SUNS) also yielding in the mid 7s, I do not have the expectation that GBDC would merit further yield compression based on safety. Based on the consensus analyst EPS projection, the 2013 P/E ratio of 12.46 is well above the sector average of 10.47. The Price/NAV ratio of 1.10 is close to being in line with the sector average of 1.05. On most of the metrics, GBDC is already expensive.

The BDC sector can be volatile. And GBDC is a good "buy on a large dip" candidate. But GBDC failed to have much of a fall with the rest of the sector in the February 21st dip or the April 15th dip. That is a positive attribute if you own it and are selling - and a negative attribute if you are buying. If you want the safest BDC, buy PFLT due to it high ownership of secured loans and superior dividend coverage. I would also put KED, SUNS {even though it currently lacks dividend coverage} and TAXI in the safe camp. If you want "safer than average," you can buy GBDC, MAIN, NMFC or ARCC. I have warned in precious writings that you do not want to own canaries of the sector. The BDC canaries would logically be those with heavier weightings in subordinated debt to portfolio companies with less favorable debt metrics. GBDC appears to have the metric attributes that should result in it not being a canary. The price action on February 21 and April 15 is further evidence that GBDC is not a canary.

The bottom line for me - I just cannot get excited about GBDC at its current valuations. I would want to see some dividend growth inertia before I fully buy in to the GBDC growth story. You are usually late to the party when you wait for an abundance of evidence that dividend growth is about to come. And you are most often paid to wait with a higher than average dividend yield. But GBDC is already priced as if dividend growth - or the party - has already started. I do not see the potential for much yield compression once mild dividend growth starts.

Thus I see no penalty in waiting for the dividend growth to start later this year or early in 2014. By then GBDC will have a bit longer of a track record. By then we will have better visibility on the 2015 EPS projections - and be able to use the dividend to EPS ratio (the focus of a prior article) to better size the expected dividend growth. We will see if the shift away from safety continues. We will see if that shift results in a higher level of non-accruals. We will see if dividend growth begins to happen. And we will see if management starts reporting their portfolio companies' debt to EBITDA and interest coverage ratios.

Source: Would A Growing Dividend Make Golub Capital A Buy?