TICC Best BDC Dividend Dog For January, Analysts Say

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Includes: ACSF, AINV, CORR, CPTA, FSC, FSFR, GECC, GLAD, KCAP, MCC, OXLC, PNNT, PSEC, SCM, TICC
by: Fredrik Arnold

Summary

Yield for 40 Business Development Companies (BDCs) ranged from 7.63% to 26.4% as of January 15. Top 10 were: OXLC, TICC, PNNT, KCAP, FULL, MCC, GLAD, CPTA, PSEC, & AINV.

Actionable conclusions: 1. Top yield BDCs invest in CLOs or mid-market firms; 2. Top BDC dogs retreated as Dow dogs charged; 3. Dow dogs are overbought; 4. BDCs are not.

Thirty BDC firms showed upsides averaging 40,82% and net gains averaging 39.46%. Analysts forecast top 1-yr. net gains for ACSF; FSC; SCM; FSFR; PNNT; CPTA; GLAD; OXLC; FULL; TICC.

Those 10 top Business Development Company [BDC] stock upsides averaged 60.8% with 76.9% net gains. Top dog TICC showed 81% upside and a 105.24% projected gain.

Ten Top BDC stocks by yield showed 7.07% more gain from a $5k investment in the lowest priced five than from $5K in all ten.

Why BDCs?

Yield (dividend/price) results from Yahoo Finance as of market closing prices January 15 for Business Development Company Stocks listed here were gauged by dog metrics to reveal the actionable conclusions that follow.

After June 2014, when the Acquired Fund Fees and Expenses (AFFE) proviso of the SEC prompted both the Russell and S&P 500 publishers to remove 40 BDC dogs from their primary equity indices, it became appropriate to track BDC progress as a pack. This is the latest of those ongoing progress reports.

40 For the Money

Since late 2011, a series of Arnold reports showed results of dog dividend methodology used to uncover possible buy opportunities in each of eight major market sectors listed by Yahoo Finance. Reader suggestions inspired our first dividend dog analysis of the Business Development Company industry within the financials (Fins) sector after August 2014. This article continues the follow-up.

Written to reveal bargain stocks to buy and hold one full year, this article is supported by previous efforts. See Dow 30 article for explanation of the term "dogs" for stocks reported based on Michael B. O'Higgins' book "Beating The Dow" (HarperCollins, 1991), now named Dogs of the Dow. O'Higgins' system works to find bargains in any collection of dividend paying stocks. Utilizing analyst price upside estimates expanded the stock universe to include popular growth equities, as desired.

Dog Metrics Plot BDC Stocks by Yield

Ten business development company dogs showing the biggest dividend yields as of January 2016 represented companies looking to invest growth capital of $3m to $1.5b, in profitable small to middle market private businesses, with revenues over $10 million, operating in lucrative niche industries.

Actionable Conclusion (1): Top Yield BDCs Invest in CLOs or Mid-Market Private Businesses

The highest yield BDC industry stock invests in corporate Collateralized Loan Obligation [CLO] instruments: Oxford Lane Capital (NASDAQ:OXLC) [1]. The other CLO investor placed sixth, KCAP Capital (NASDAQ:KCAP) [6].

Second place firm TICC Capital (NASDAQ:TICC) [2] was one of three in the top 10 BDC dogs by yield that did not disclose their investment targets. Other non-disclosing companies placed eighth and ninth: Capitala Finance (NASDAQ:CPTA) [8], and Prospect Capital (NASDAQ:PSEC) [9].

The remaining five BDCs invest growth capital of $3m/$150m. PennantPark Investment (NASDAQ:PNNT) [3] has an investment range of $15m/$50m. Full Circle Capital (FULL) [5] looks to invest $3m/$10m. Medley Capital (NYSE:MCC) [6] invests $10m/$50m, and Gladstone Capital (NASDAQ:GLAD) [7] brings $3m/$15m to the table. Finally, Apollo Investment (NASDAQ:AINV) [10] looks to invest $20m/150m. These completed the top 10 BDC dog list by yield for mid-January.

BDC Top Yield Dividend vs. Price Results Compared to Dow Dogs

Graphs below contrast relative strengths of the top 10 BDC industry dogs by yield as of market close 1/15/2016 with those of the Dow industrials index. Annual dividend history from $10,000 invested as $1k in each of the 10 highest yielding stocks along with the total single share price of those 10 stocks made the data points shown in green for price and blue for dividends.

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Actionable Conclusions: (2) BDCs Retreated As (3) Dow Dogs Charged into January

The BDC collection of dividend payers moved higher in dividend but dropped in price after November/December. Single share price plummeted 32.5% and aggregate dividend from $10k invested as $1k in each of the top 10 BDC dogs soared 24.7%.

A large margin of opportunity (and risk) is revealed by the gap between aggregate single share price and the annual dividend amount derived from $10k invested as $1k in each top 10 BDC.

Actionable Conclusion (4): Dow Dogs Are Overbought (Overpriced)

Dow dogs charged as projected annual dividend from $10k invested as $1K in each of the top 10 fell 0.7% after November/December. At the same time, aggregate single share price rose 7.5% to affirm the bullish charge signal.

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The Dow dogs' overbought condition (in which aggregate single share price of the 10 exceeded projected annual dividend from $1k invested in each of the 10) widened after it narrowed considerably in November/December. Historically, the overhang was $239 or 62% for February; widened to a record gap of $388 or 102% in March; shrank back to $291 or 79% for April; widened again to $320 or 90% to begin May. The June gap fell to $296 or 80%. However, July/August saw the gap between dividend and price widen again to $331 or 85%. September shrank the gap to $268 or 65%. October saw the gap widen to $333 or 86%. November, however, added a dose of reality to close the overbought window to $265 or 67%.

As of January 15, however, the burden of the Boeing $129 price over the GE $30 level in 10th place, raised the aggregate price of the top 10. Meanwhile, IndexARB slashed the VZ dividend estimate of $2.28 to $1.71, which reduced the likely dividend from $10k invested as $1K in each of the 10. Those actions widened the gap to $316 or 80.9% as of 1/15.

[Since the Dow Index is trying to decline again, I invite you to sign on to my premium site, The Dividend Dog Catcher, to share my discussion about how the Dow (short of tossing out IBM and Boeing) could return to a "normal" balance where dividends from 10 $1k investments can again exceed the aggregate single share price of those 10 stocks.]

The Dow industrial index's gap between high share price and low dividend per $1k invested shows an overbought condition. Meaning these are low risk and low opportunity Dow dogs.

This contrasts mightily with the large risk/profit opportunity presented by the soaring projected dividends against low share price displayed by BDCs.

Actionable Conclusions: Top 30 October BDCs (5) Upsides Averaged 40.82%; (6) Net Gains Averaged 39.46%

Historic prices and actual dividends paid from $30,000 invested as $1k in each of the highest yielding stocks and the aggregate single share prices of those 30 stocks divided by 3 created data points for 2016. Projections based on estimated dividend amounts from $1000 invested in each of the 30 highest yielding stocks and aggregate one-year analyst target share prices from Yahoo Finance divided by 3 created the 2017 data points green for price and blue for dividend.

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Analysts, as reported by Yahoo, projected 29.5% lower dividend from $10K invested as $1k in 10 dogs in this group, while aggregate single share price for those 10 was projected to increase 36.7% in the coming year.

Actionable Conclusion (7) Top 10 BDC Upsides Predicted For January 2017 Ranged from 45.74% to 81%

Yahoo analyst 1-yr targets predicted five stocks holding their places by price upside when net gains are calculated for January 2017. The other five listed, swap places dramatically to change their order when dividend returns and broker fees are included in their calculated values.

The number of analysts contributing to the mean target price estimate for each stock was noted in the next to the last column on the charts. Three to nine analysts was considered optimal for a valid projection estimate. Estimates provided by one analyst were not applied (n/a).

A beta (risk) ranking for each stock was provided in the far right column of the above chart. A beta of 1 meant the stock's price would move with the market. Less than 1 showed lower than market movement. Higher than 1 showed greater than market movement. A negative beta number indicated the degree of a stocks movement opposite of market direction.

Actionable Conclusion (8): Analysts Predicted Top Ten BDC Net Gains From 58% to 105,24% by January 15, 2017

Six of the ten top dividend yielding BDC dogs were verified as being among the ten gainers for the coming year based on analyst 1 year target prices. So this month the dog strategy for the BDC industry as graded by Wall St. wizards was a60% accurate.

Ten probable profit generating trades were revealed by Thomson/First Call in Yahoo Finance for 2017:

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TICC Capital was projected to net $1,052.40 based on dividend plus a mean target price estimate from three analysts less broker fees. The Beta number showed this estimate subject to volatility 76% less than the market as a whole.

Oxford Lane Capital was projected to net $1,004.20, based on dividends plus mean target price estimate from two analysts less broker fees. The Beta number showed this estimate subject to volatility 13% less than the market as a whole.

Full Circle Capital was projected to net $944.44 based on a mean target price estimate from three analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 46% less than the market as a whole.

Gladstone Capital was projected to net $795.20 based on dividends plus the lowest of annual price estimates from three analysts less broker fees. The Beta number showed this estimate subject to volatility 5% less than the market as a whole.

Capitala Finance was projected to net $774.22 based on dividends plus the median of annual price estimates from thirteen analysts less broker fees. A Beta number was not available for CPTA.

PennantPark Investment was projected to net $692.98 based on dividends plus the median of annual price estimates from ten analysts less broker fees. The Beta number showed this estimate subject to volatility 22% more than the market as a whole.

Fifth Street Senior Floating Rate Corp. (NASDAQ:FSFR) was projected to net $656.06 based on dividends plus the mean of annual price estimates from five analysts less broker fees. The Beta number showed this estimate subject to volatility 89% less than the market as a whole.

Stellus Capital Investment was projected to net $626.39 based on dividends plus a mean target price estimate from six analysts less broker fees. The Beta number showed this estimate subject to volatility 82% less than the market as a whole.

Fifth Street Finance (NYSE:FSC) was projected to net $582.34 based on estimates from thirteen analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 3% opposite the market as a whole.

American Capital Senior Floating (NASDAQ:ACSF) was projected to net $567.44, based on the lowest target price estimate from five analysts plus dividends less broker fees. A Beta number was not available for ACSF.

Average net gain in dividend and price was 76.96% on $10k invested as $1k in each of these ten dogs. This gain estimate was subject to average volatility 49% less than the market as a whole.

Dog Metrics Extracted Bargains

Ten top global dividend stocks that showed the biggest dividend yields January 15 per Yahoo Finance data, as you recall, six of nine sectors: basic materials; utilities; financials; technology; services; industrial goods. They ranked themselves by yield as follows:

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Actionable Conclusions: (1) Analysts Forecast 5 Lowest Priced of Top Ten Highest Yield BDC Dogs To Deliver 79.25% VS. (2) 74.01% Net Gains from All Ten by January, 2017

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$5000 invested as $1k in each of the five lowest priced stocks in the top ten Global kennel by yield were alleged by analyst 1 year targets to deliver 37.9% more net gain than $5,000 invested as $.5k in all ten. The third lowest priced BDC dog, TICC Capital , was projected to deliver the best net gain of 105.24%.

Lowest priced five BDC dogs as of January 15 were: Full Circle Capital ; KCAP Financial, Inc. ; TICC Capital ; Gladstone Capital ; Apollo Investment , with prices ranging from $2.25 to $5.00.

Higher priced five BDC dogs for January 15 were: PennantPark Investment ; Prospect Capital ; Medley Capital ; Oxford Lane Capital ; Capitala Finance , whose prices ranged from $5.47 to $11.08.

This distinction between five low priced dividend dogs and the general field of ten reflects the "basic method" Michael B. O'Higgins employed for beating the Dow. The added scale of projected gains based on analyst targets contributed a unique element of "market sentiment" gauging upside potential. It provided a here and now equivalent of waiting a year to find out what might happen in the market. Its also the work analysts got paid big bucks to do.

A caution is advised, however, as analysts are historically 20% to 80% accurate on the direction of change and about 0% to 20% accurate on the degree of the change.

The net gain estimates above did not factor-in any foreign or domestic tax problems resulting from distributions. Consult your tax advisor regarding the source and consequences of "dividends" from any investment.

See my instablog for specific instructions about how to best apply the dividend dog data featured in this article.

The net gain estimates above did not factor-in any foreign or domestic tax problems resulting from distributions. Consult your tax advisor regarding the source and consequences of "dividends" from any investment.

Stocks listed above were suggested only as possible starting points for your index dog dividend stock purchase research process. These were not recommendations.

Do any of these business development pups qualify as valuable catches? Check out the now 22 Dogs Of The Week (DOTW) found on The Dividend Dog Catcher premium site. Click here to subscribe: http://seekingalpha.com/account/research/subscribe?slug=fredrik-arnold&source=auths_effs_fredrik-arnold

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Disclaimer: This article is for informational and educational purposes only and should not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security. Prices and returns on equities in this article except as noted are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.

Graphs and charts were compiled by Rydlun & Co., LLC from data derived from www.finance.yahoo.com; analyst mean target price by Thomson/First Call in Yahoo Finance.

Disclosure: I am/we are long FSC, PFE, VZ, INTC.

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.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.