Yield (dividend/price) results from Yahoo Finance as of market closing prices March 17 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 over 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.
Forty 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 the 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 followed 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 Found BDC Stocks By Yield
10 business development company dogs showing the biggest dividend yields as of March 17 represented companies looking to invest growth capital of $3 million to $1.5 billion, 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) . The other CLO investor placed third, KCAP Financial (NASDAQ:KCAP) .
Second place firm TICC Capital (NASDAQ:TICC)  was one of three in the top 10 BDC dogs by yield that did not disclose its investment targets. Other non-disclosing companies placed seventh and eighth: Capitala Finance (NASDAQ:CPTA)  and Fifth Street Finance (NYSE:FSC) .
The remaining five BDCs invest growth capital of $3 million/$350 million. PennantPark Investment (NASDAQ:PNNT)  has an investment range of $15 million/50 million. Medley Capital (NYSE:MCC)  looks for investment opportunities in the $10 million/50 million range. Full Circle Capital (FULL)  looks to invest $3 million/10 million. Finally, Apollo Investment (NASDAQ:AINV)  looks to invest $20 million/150 million, and WhiteHorse Finance (NASDAQ:WHF)  brings $50 million/350 million to the table. These completed the top 10 BDC dog list by yield for mid-March.
BDC 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 3/17/2016 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.
Actionable Conclusions: (2) BDCs Charged into March As (3) Dow Dogs Did Too
The BDC collection of dividend payers dropped lower in dividend but rallied up in price after January/February. Single share price inclined 10% and aggregate dividend from $10k invested as $1k in each of the top 10 BDC dogs dropped 5.6%.
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 7% after February. At the same time aggregate single share price rose 16.7% to affirm the bullish charge. Dow dogs dropped in dividend and their aggregate share price inclined after Procter & Gamble (NYSE:PG) replaced Intel (NASDAQ:INTC) in the top ten as of 3/17.
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 February. Historically, the overhang was $291 or 79% for April; widened to $320 or 90% to begin May; and soared to the new record $406 or 112% in June.
The Dow bubble deflated as DuPont (NYSE:DD) replaced IBM (NYSE:IBM) in the 10 slot of the top 10 for July to peg the gap at $269 or 71%, then inflated again as IBM replaced Pfizer (NYSE:PFE) to widen the gap to $331 or 85% for August. September brought some sanity back to the runaway Dow when the gap stood at $279 or 67%. October increases in price by Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM) pushed the gap to $334 or 85%.
November changed out McDonald's (NYSE:MCD) for Wal-Mart (NYSE:WMT), and GE (NYSE:GE) for Coca-Cola (NYSE:KO). The resulting price over dividend gap went to $303 or 78%. As of December 4, the gap stood at $292 or 75%.
As of January 15, however, the gap widened to $351 or 91.5 %. February moves reduced the gap to $254 or 62% February 16. March however widened the chasm to $395 or 103%, close to the record last set in June.
This gap between high share price and low dividend per $1k invested defines the Dow overbought condition. Meaning these are low-risk and low-opportunity Dow dog stocks. The Dow top 10 average price per dollar of annual dividend is $26.25.
This contrasts mightily with the large risk/profit opportunity presented by the soaring projected dividends against low share price displayed by BDCs. The BDC top 10 average price per dollar of annual dividend was $5.42.
Actionable Conclusions: Top 30 March BDC (5) Upsides Averaged 27.3%; (6) Net Gains Averaged 40.56%
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 three created data points for 2016. Projections based on estimated dividend amounts from $1,000 invested in each of the 30 highest yielding stocks and aggregate one-year analyst target share prices from Yahoo Finance divided by three created the 2017 data points green for price and blue for dividend.
Analysts, as reported by Yahoo, projected 13.8% 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 16.3% in the coming year.
Actionable Conclusion (7) Top 10 BDC Upsides Predicted For March 2017 Ranged From 23% To 45%
Yahoo analyst one-year targets predicted one stock holding its place by price upside when net gains are calculated come March 2017. That was Capitala Finance at the top. The other nine stocks as 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 have proved to provide more accurate projected estimates. 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 stock's movement opposite of market direction.
Actionable Conclusion (8): Analysts Predicted 10 Ten BDC Net Gains From 32% To 58.9% By March 17, 2017
Five of the 10 top dividend-yielding BDC dogs were verified as being among the 10 gainers for the coming year based on analyst one-year target prices. So this month the dog strategy for the BDC industry as graded by Wall St. wizards was 50% accurate.
10 probable profit-generating trades were revealed by Thomson/First Call in Yahoo Finance for 2017:
Capitala Finance was projected to net $588.81, based on dividends, plus the median of annual price estimates from 12 analysts, less broker fees. A Beta number was not available for CPTA.
TICC Capital was projected to net $482.40, based on dividends, plus a mean target price estimate from two analysts, less broker fees. The Beta number showed this estimate subject to volatility 57% less than the market as a whole.
Stellus Capital Investment (NYSE:SCM) was projected to net $442.28 based on dividends, plus a mean target price estimate from five analysts, less broker fees. The Beta number showed this estimate subject to volatility 82% less than the market as a whole.
KCAP Financial was projected to net $404.15, based on the lowest target price estimate from three analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to volatility 40% less than the market as a whole.
Full Circle Capital (FULL) was projected to net $399.09, 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 85% less than the market as a whole.
Harvest Capital Credit (NASDAQ:HCAP) was projected to net $377.71, based on dividends, plus mean target price estimate from two analysts, less broker fees. The Beta number showed this estimate subject to volatility 86% less than the market as a whole.
Garrison Capital (NASDAQ:GARS) was projected to net $361.96, based on dividends, plus the lowest of annual price estimates from seven analysts, less broker fees. The Beta number showed this estimate subject to volatility 88% less than the market as a whole.
WhiteHorse Finance was projected to net $350.08, based on dividends, plus the median of annual price estimates from five analysts, less broker fees. The Beta number showed this estimate subject to volatility 31% less than the market as a whole.
American Capital Senior (NASDAQ:ACSF) was projected to net $349.03, based on the lowest target price estimate from four analysts, plus dividends, less broker fees. A Beta number was not available for ACSF.
Hercules Technology Growth (NASDAQ:HTGC) was projected to net $320.37, based on dividends, plus the mean of annual price estimates from nine analysts, less broker fees. The Beta number showed this estimate subject to volatility 38% less than the market as a whole.
Average net gain in dividend and price was 40.56% on $10k invested as $1k in each of these 10 dogs. This gain estimate was subject to average volatility 62% less than the market as a whole.
Dog Metrics Attempted To Extract Bargains
10 top REIT revenue stocks that showed the biggest returns March 17 per Yahoo Finance data, as you recall, were categorized by three types of investing: (1) Corporate Collateralized Loan Obligation (CLO) instruments ; (2) undisclosed investment targets ; and (3) set limit growth capital investments of $3m to $1.5b . All were seeking profitable small to middle market private businesses, with revenues over $10 million, operating in lucrative niche industries. The BDCs ranked themselves by yield as follows:
Actionable Conclusions: (1) Analysts Forecast Five Lowest Priced Of Top 10 Highest-Yield BDC Dogs To Deliver 35.97% Vs. (2) 36.88% Net Gains From All 10 by March, 2017
$5,000 invested as $1k in each of the five lowest-priced stocks in the top 10 BDC kennel by yield were determined by analyst one-year targets to deliver 2.48% less net gain than $5,000 invested as $.5k in all 10. The highest priced BDC dog, Capitala Finance, was projected to deliver the best net gain of 58.88%.
Lowest-priced five BDC dogs as of March 17 were: Full Circle Capital; KCAP Financial, Inc.; TICC Capital; Fifth Street Finance; Apollo Investment, with prices ranging from $2.41 to $5.56.
Higher-priced five BDC dogs for March 17 were: PennantPark Investment; Medley Capital; Oxford Lane Capital; WhiteHorse Finance; Capitala Finance, whose prices ranged from $6.13 to $11.58.
This distinction between five low-priced dividend dogs and the general field of 10 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. It's 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. - Fredrik Arnold
Stocks listed above were suggested only as possible starting points for your BDC dog dividend stock purchase research process. These were not recommendations.
One of these business development pups qualifies as a valuable catch! Check out the now 31 Dogs Of The Week (DOTW) found on The Dividend Dog Catcher premium site. Click here to investigate and subscribe.
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.
Disclosure: I am/we are long FSC, CSCO, PFE, VZ.
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.