Barron's had a solid piece on business development companies (BDCs) in this week's magazine. It is one of the few articles I have seen in a major financial magazine about these relatively new and high yield investments. The author smartly points out that BDCs have several advantages over high yield bonds (AKA, Junk Bonds) which include:
A) They yield around 3% over comparable junk bonds currently.
B) Many BDC loans are "senior secured" debt. This places them in front of junk bond holders in being paid in the event of bankruptcy.
C) BDCs often pick up equity warrants when they make loans to businesses, which provide another avenue of potential gains.
D) Loan loss rates are currently running at .7% for capital deployed; a better record than commercial banks at this time.
E) BDCs have a nice niche as they tend to lend to smaller companies that cannot tap the bond market and commercial banks have pulled back lending to this space to preserve capital.
Regular readers of my column know that I have been a consistent and frequent advocate of BDCs as a part of a prudent investor's income portfolio for over a year. I have provided several pieces on BDC Hercules Technology Growth Capital (HTGC). I have owned the shares since they were trading at $10 a share in February 2012. They are now trading at $12 and I have been picking up an 8 plus percent the whole way as well. I still like the shares here.
Hercules Technology Growth Capital, Inc. is a private equity, venture capital, and venture debt firm specializing in providing debt and equity to privately held venture capital and private equity backed companies and select publicly-traded companies.
Four additional reasons to own HTGC at $12 a share:
- HTGC yields 8.3% and has raised its distribution payouts by 25% over the past three years.
- Revenue is expected to grow more than 30% this fiscal year and almost 20% in FY2014.
- The shares sell for less than 10x 2014's projected earnings, very cheap for an 8% plus yielder.
- The company has beat earnings estimates each of the last four quarters. In addition, consensus earnings estimates for both FY2013 and FY2014 have ticked up over the last two months.
Another business development company I like here is TICC Capital Group (TICC) which I plan to pick up the next dip in the overall market.
4 reasons TICC is a good income pick up at $9.50 a share:
- TICC yields 12.3% and the company has almost doubled its distribution payout over the past three years.
- The five analysts that cover TICC have an $11 median price target on the shares.
- Another rapid grower. Analysts expect the company to grow revenues at better than 35% in FY2013 and over 20% in FY2014.
- TICC is cheap at 94% of book value and just 8x 2014's projected earnings. There have been no insider sales in over two years.