Total Return BDCs: Q1 2014 Final

by: BDC Buzz

(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)

This is a series of articles attempting to find the "best in class" BDCs for my updated "Total Return Portfolio" for 2014. Please read "Part 1" for a complete description of the portfolio but basically it is for investors that want dependable regular dividends and the potential for special dividends as well as long-term capital appreciation from increased stock values. The other five portfolios that I cover are: General, Risk Averse, High-Yield, Value, and Underdog. This article will combine the information from the previous sections to come up with two total return portfolios for investors who want higher returns but with increased risk and the other for investors that are seeking higher than average returns with lower than average risk.

Projected Dividend Yield

The following table uses the information from the previous articles to come up with projected dividend yield for each BDC. Specifically it incorporates projected EPS, portfolio growth potential and current dividend coverage. However I have only assumed half of the amount of growth (or anticipated dividend cuts) discussed in Part 5 due to timing and assuming the change in distribution is on average over the next six months. For example Main Street Capital (MAIN) currently pays $0.165 per month and I have assumed it will grow to $0.18/$0.19 over the next twelve months but I have used only half of that dividend growth to project yield. Conversely for BlackRock Kelso Capital (BKCC) and Full Circle Capital (FULL) I have assumed some sort of dividend cuts later in the year. The anticipated cut for BKCC could be as much as 20% from the current $0.25 to $0.20. It is important to keep in mind that BDCs can choose to pay special dividends for spillover income instead of committing to increased dividends. Either way it is extra yield for investors over the next twelve months.

Projected Total Returns

The following table combines the projected yield from the previous section with NAV per share growth and committed (or anticipated) special dividends for 2014 to come up with projected total returns.

Portfolio Results

The table below uses the projected returns from the previous sections and the pricing methodology discussed in Part 7, comparing the implied price to current prices and identifies the portfolios I have suggested for each including a lower risk total return portfolio and a new higher total return portfolio:

As you can see the lower risk portfolio is the same components as my previous 'Total Return' portfolio and Hercules Technology Growth Capital (HTGC) is the only one with a close to average risk profile. The new higher return portfolio includes each of the BDCs that I believe will return at least 12% or more to investors. It is also important to understand that these returns are above and beyond general market increases and decreases. That means if the market is up and BDCs rise along with it (as they usually do) these returns would be incremental to higher stock prices and hopefully outperform the market after taking into account all forms of return.

Lower Risk Total Return Portfolio

This suggested portfolio includes MAIN, HTGC, Fidus Investment (FDUS), New Mountain Finance (NMFC) and Ares Capital (ARCC) with an average risk ranking well above average and total projected returns of 12.4% compared to the average BDC at 10.9%.

Other contenders for this portfolio: THL Credit (TCRD), Medley Capital (MCC), TCP Capital (TCPC) and Golub Capital BDC (GBDC) all have safer than average risk profiles with decent returns but less NAV growth. I will reconsider these BDCs after all companies have reported results for 2013.

Higher Total Return Portfolio

This suggested portfolio is riskier but with higher current dividend yield and projected returns.

Both Gladstone Capital (GLAD) and KCAP Financial (KCAP) have been in the lower half of my rankings for a while mostly due to risk but both have much higher return rankings that takes into account everything that this portfolio is looking for. PennantPark Investment (PNNT) has above average returns for and average amount of risk and helps to balance out the portfolio with MAIN and HTGC.

Other contenders for this portfolio: Prospect Capital (PSEC) has high projected return but also has very little NAV per share growth due to continued equity issuances and dilution issues. Investors seems to pay lower multiples for this and other issues including increasing amounts of riskier investments to support dividends. At this point I believe PSEC is range bound and offers little in the way of price appreciation. Fifth Street Finance (FSC) is still being penalized for cutting its dividend and also has very little NAV growth. TICC Capital (TICC) and MCG Capital (MCGC) were also considered but I will wait for results before including them.

As discussed in "Apollo Investment: Should It Be Upgraded?" Apollo Investment (AINV) is currently part of my suggested 'underdog' portfolio and recently reported favorable results beating EPS estimates for a third quarter in a row along with large NAV growth. This drove the stock price to new highs effectively giving it a lower yield but it has recently announced a 12 million share offering that could bring the price down.

Triangle Capital (TCAP) is also priced higher bringing its yield down and giving it lower returns but continually has higher NAV per share growth than most BDCs.

The last article in this series will be next month after all BDCs have reported and I will provide updated information and projections. At that point I will most likely be making changes to my personal BDC portfolio as well. Investors should only use this information as a starting point for due diligence. See the following for more information:

Disclosure: I am long MAIN, TCPC, ARCC, FDUS, TCRD, PSEC, NMFC, FSC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.