GLAD To Not Own Gladstone Capital: A Business Development Company In Danger

| About: Gladstone Capital (GLAD)

Gladstone Capital (NASDAQ:GLAD) is a business development company that recently announced 4th-quarter earnings. Given trends in the quarterly filings, I believe that GLAD is a sell. This article will discuss the motivation for thinking as much.


GLAD reported net income of $0.21 per share, which covers the monthly dividend of $0.07. The current stock price of $9.26 results in an annualized yield of just over 9%. From Q4 2010 to Q4 2011, however, net investment income dropped from $0.22 to $0.21 - largely due to added debt expense.

Net Asset Value (NAV)

GLAD reported a NAV at the end of Q4 2011 of $9.90. Over the past 5 quarters (from earliest to latest) the NAV change is as follows: 11.85, 11.18, 10.34, 10.16, 9.90. GLAD management has lost $1.95 of NAV while only paying out $1.05 in dividends. This net decrease of -$0.90 suggests that GLAD is eroding value faster than it can distribute money to shareholders.

Portfolio Performance

GLAD's entire portfolio was valued at 79 cents on the dollar at the end of Q4 2011. This represents a 10 basis point drop relative to the previous quarter's number of 79.1 cents on the dollar. GLAD realized $8.4 million in losses due to the exit of two investments - KMBQ (1 million loss) and Newhall (7.4 million loss). When a business development company exits an investment, the ideal situation is to get paid off at par. This result is less than desirable.

Per the latest 10Q, the following table lists all investments on non-accrual (i.e. not generating income) status.



Access Television

cable airtime (infomercials)


web-based evaluator of imaging products

Kansas Cable

cable, internet provider

Lindmark Acquisitions



Yellow pages publishing

US Healthcare Communications

Magazine publishing

These companies are all in the struggling media/print/advertising segments. Unfortunately, GLAD is overweight companies in this sector.

What is even more important is the health of the portfolio companies that are currently providing the income to GLAD for distribution to shareholders. In the table below, I list all portfolio companies that are currently generating income, but are valued at 75 cents on the dollar or below.



Value (cents on the dollar)

BAS Broadcasting

Radio station operator


Chinese Yellow Pages Company

Publisher of Chinese language directories


GFRC Holdings

Manufacturing glass fiber reinforced concrete


Heartland Communications Group

Radio station operator


International Junior Golf Training

Golf training


Legend Communications of Wyoming

Operator of radio stations


Sunburst Media

Radio station operator



Manufacturing polyethylene film


Sunshine Media

Publisher of regional trade magazines


After digesting this list, all I can say is really? These are the so-called "proprietary" investments GLAD boasts of? Notice anything in common between this table and the previous one? A lot of the names are in the print/media sector. GLAD's portfolio is significantly overweight a struggling industry. Furthermore, a few of these companies (Viapack and Sunshine Media) are valued at 20 cents on the dollar. There is a reason for this. My guess is that these investments will not be generating income for long.


I believe that over the course of 2012, the poor health of GLAD's underlying portfolio will start be felt at the top line. If additional investments were to go on non-accrual status (and the fact that many are priced at or below 50 cents on the dollar suggests this is possible), net investment income per share will drop. In response, GLAD will either pay more money than it takes in, or cut the dividend.

GLAD's share price has been on a nice run of late (as has the entire business development company sector). Given that share price lies below NAV, it is entirely possible that GLAD rises another 50 cents or so. However, the historical trend in NAV coupled with GLAD's portfolio composition does not merit any premium to NAV. As such, I believe that GLAD is at or near its peak with high risk and low reward.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Tagged: , , , Asset Management
Problem with this article? Please tell us. Disagree with this article? .