This article focuses on Medley Capital (MCC) and compares it to the other business development companies ("BDCs") with dividend yields of 9% or higher and P/E ratios below 11 times.
These are the five general criteria I use to evaluate BDCs:
- Profitability (EPS to cover dividends, NAV and EPS growth)
- Risk (diversification, portfolio quality, volatility, leverage)
- Payout (sustainable, consistent, growing)
- Analyst Opinions
- Valuation (NAV, P/E, PEG)
For more information about BDCs and how I evaluate them, please see this article.
Below is an oversimplified table with rankings between 0 and 10 (10 being the best) relative to the 25 BDCs I have reviewed. 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.
MCC is one of the newer BDCs completing its IPO in January 2011, and it has been actively raising capital with debt and equity offerings. On March 26, it received a license from the U.S. Small Business Administration to operate as an SBIC giving it increased access to a lower cost of capital. EPS increased each quarter since the IPO and exceeded analyst expectation for all but one quarter, with excellent coverage of dividends paid. Analysts are projecting 10% growth over the next 24 months after taking into account the dilutive nature of new share issuances.
MCC's portfolio has better-than-average industry diversification (see chart below) with 43% of investments bearing floating rates and no loans on non-accrual status.
MCC has one of the lowest debt-to-equity ratios at 0.45 and one of the safest asset class mixes compared to most BDCs, with 99% of investments in senior secured loans or notes (see table below).
The current dividend yield of 9.4% is slightly higher than the average BDC but MCC has consistently increased its dividend since the IPO and as EPS is projected to grow, hopefully so will its dividend.
Most analysts rate MCC a 'Buy' with a target price between $16 and $17.
This section is covered in the summary below.
Currently MCC is trading at a P/E of 10.7 using the last 12 months' EPS, which is below the BDC average of around 11.6, and a 21% premium to NAV, which is above the current average of 12%. Below is a table comparing some of the highest-yielding BDCs with some of the lowest P/E multiples. Using LTM EPS for PSEC would give it an artificially low P/E because of profits from the Gas Solutions sale in January 2012, taken as income rather than capital gains and was a temporary fourth-quarter bump. Its stabilized EPS run rate is around $0.30 per quarter and using an annualized $1.20 EPS would give PSEC a P/E of 9.0.
BDCs are usually priced near or at book value because they are required to distribute at least 90% of capital gains, dividends and interest to shareholders, and as shown in the table above, tend to average little or no annual growth in NAV. MCC has outperformed most BDCs in the last two weeks and is priced at a higher premium to NAV probably due to expected growth and favorable risk profile. Financial results for March 2013 are expected later this week with projected EPS of $0.37 (recently increased from $0.36) and NAV per share is not expected to change materially from $12.69.
- Part 24 - Main Street Capital (MAIN) and Triangle Capital (TCAP)
- Part 23 - BlackRock Kelso Capital (BKCC) and Fifth Street Finance (FSC)
- Part 22 - Prospect Capital (PSEC)
- Part 21 - PennantPark Floating Rate Capital (PFLT)
- Part 20 - American Capital (ACAS)
- Part 19 - Full Circle Capital (FULL)
- 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
- 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)