We’ve just reviewed Triangle Capital’s (TCAP) 10-Q filing for the period ended June 30, 2010, listened to the company’s first ever Conference Call on August 5th, and looked over the Earnings Report again. All of this with a view to providing readers with our outlook for TCAP’s dividend.
WHY THE DIVIDEND IS IMPORTANT: For most investors in BDCs, the dividend level is a key element in the buy or sell decision. That’s because the dividend is a useful proxy for earnings, as BDCs are required to distribute essentially all their taxable earnings (not including Unrealized Gains or Losses) in the form of distributions. [Like everything else in the Business Development Company arena, though, nothing is black and white. BDCs have a variety of dividend strategies: some pay out a distribution higher than current earnings in the anticipation that profits will grow as capital is deployed. Others religiously pay out only what is earned, or projected to be earned, in the current tax year. Some BDCs pay out only a portion of earnings, squirreling away the rest for future periods.] Notwithstanding all the above, a company’s dividend is a very useful indicator of its financial health and prospects. Most investors seek BDCs that promise a steady, or increasing dividend level. Usually a reduction in the dividend results both in lower income and a reduced stock price.
We are reviewing every BDC we track (we’re up to twenty four) and providing our view for the dividend outlook in the short run (next quarter) and long run (4 quarters out). We’d love to say we could project our further but there are too many variables to make that useful.
TRIANGLE CAPITAL: BRIEF SUMMARY
Triangle Capital is principally a lender/investor in the lower middle market, with roughly 90% of investment assets in second lien or mezzanine loans and 10% in equity positions in these smaller companies. The Company debt funding comes exclusively (which is unusual) from the SBIC. On June 30, TCAP had $241mn in investment assets at fair market value, funded partly with $154mn in SBIC borrowings.
Currently, TCAP is paying out a quarterly dividend of $0.41 announced through the third quarter of 2010. That’s the fifth dividend in the row at this level. TCAP is what we call a Dividend Superstar because the Company has never reduced its pay-out since inception in early 2007. For the full dividend history, go here.
The Company has been paying out a distribution in excess of its earnings for the last three quarters due to an equity raise last year which diluted Net Investment Income Per Share. Still, in the last quarter the gap between Net Investment Income Per Share and the dividend was only 3 cents.
OUTLOOK FOR IVQ 2010 DIVIDEND: UNCHANGED
OUTLOOK FOR III Q 2011 DIVIDEND: INCREASE
DISCUSSION: TCAP, after faltering in the first quarter of the year when very little new business got done, has been on an investment spree in the last quarter, which continues into the current quarter. Deal activity, according to the Conference Call and a subsequent press release, is at a high level, with two new deals booked since June and on good terms. The Company has the money to spend: $25mn in cash and $50mn in immediately available SBIC borrowings. Our off the cuff calculations indicate that only a fraction of those funds need to be deployed into new yield bearing investments to make up the difference between earnings and the dividend. Management said several times that they expect second half of 2010 earnings per share to exceed the dividend, and we believe them. The full impact of the new deals being booked may not show up till the IVQ of 2010, but the dividend/earnings gap may actually close in the IIIQ.
Bad debts are under control and are unlikely to rain on the parade. TCAP has 5 non-performing loans, but no likely additional candidates. There is even a prospect that one of the five under-performers might show improving performance.
Given that TCAP and many other BDCs are foreseeing a robust period of new deal activity (even accounting for loan repayments) in the next 6 months (tied to the possible higher capital gain rates coming in 2011), we can foresee earnings per share increasing in 2011. The analyst consensus is for $1.71 for next year, or nearly $0.43 a share per quarter. As a result, our outlook is for an increase in the dividend to 42cents or better a quarter by the IIIQ of 2011.
The risks to these forecasts are i) a sudden drop-off in deal activity and/or a corresponding rise in loan repayments on the existing portfolio; ii) a sharp increase in non-accruing loans.
Disclosure: Long TCAP