In my own mind, I do not write for Seeking Alpha. I am only taking dictation, writing what the numbers are saying -- and providing you with the lessons that are in those numbers.
The Business Development Company cap weighted ETF BDCS (NYSEARCA:BDCS) has a year to date price change of -0.74% through 3-31-16 -- with dividends its year to date total return is 1.51%. In such a flat environment, it would be logical that any lessons in the numbers would be muted. For Q1-16, that presumption was wrong. I will start with two key spreadsheets that will show the numbers. I will continue with the data parsing that is the source of the lessons in the numbers. And I will end with a short buy list of BDCs that come from these key lessons.
Yield in the spreadsheet below is based on the Q1-16 "regular" dividend. Spreadsheet header abbreviations: Div = dividend; EPS = earnings per share; LTM = last twelve months; YTD = year to date. The dividend to EPS ratio is a measure of dividend safety. Due to calendar and fiscal years failing to overlap, I also include a dividend to the sum of the last four quarters of NII - in the Div/NIIltm column. For the last four columns - the first measures the percentage change in the 2016 EPS projection since the beginning of the year; the second measures the change in the price target since the beginning of the year; the third measures the change in the Q1-16 dividend from the Q1-15 dividend; and the last measures the change in NAV between Q4-15 and Q4-14. Special dividends are not included in this data. ARCC, CPTA, FDUS, FSIC, MAIN and TCPC have paid special dividends on a near regular schedule.
|Share Price||Div/||Div/||Div/||Div/||Q4-15||Price||YTD Percent Change||LTM||LTM|
|Alcentra Capital Corporation||(NASDAQ:ABDC)||11.60||11.63||11.69||96.5||93.8||95.3||9.4||14.92||0.81||0.26||3.19||-1.40||-3.80||0.00||-2.96|
|American Capital Senior Floating||(NASDAQ:ACSF)||9.83||10.03||11.57||98.3||95.1||91.4||9.8||13.53||0.85||2.03||4.98||-4.07||-10.08||0.00||-18.24|
|Apollo Investment Corporation||(NASDAQ:AINV)||5.22||5.55||14.41||95.2||96.4||93.8||10.6||7.83||0.73||6.32||10.15||0.00||-0.42||0.00||-10.32|
|Ares Capital Corporation||(NASDAQ:ARCC)||14.25||14.84||10.24||96.2||92.1||94.1||9.2||16.79||0.90||4.14||6.81||-0.63||-7.89||0.00||-2.14|
|BlackRock Capital Investment||(NASDAQ:BKCC)||9.40||9.41||8.93||80.8||82.4||94.4||8.3||10.66||0.93||0.11||2.34||2.97||-3.36||0.00||-3.05|
|CM Finance Inc||(NASDAQ:CMFN)||10.02||8.40||16.52||89.0||102.8||85.5||11.4||13.65||0.69||-16.17||-12.70||23.81||-16.67||0.00||-18.32|
|Capitala Finance Corp.||(NASDAQ:CPTA)||12.08||12.00||15.67||100.0||100.0||113.4||11.0||18.04||0.70||-0.66||3.23||-2.08||-10.67||0.00||-8.19|
|Fidus Investment Corporation||(NASDAQ:FDUS)||13.69||15.51||10.06||91.8||88.6||95.4||10.3||15.12||1.02||13.29||16.14||1.80||-2.03||2.63||0.07|
|Fifth Street Finance Corp.||(NYSE:FSC)||6.38||5.02||14.34||98.6||91.1||98.9||8.6||9.00||0.60||-21.32||-18.50||-5.19||-15.27||0.00||-8.29|
|Fifth Street Senior Floating Rate||(NASDAQ:FSFR)||8.57||7.93||11.35||94.7||94.7||96.2||7.9||12.11||0.70||-7.47||-4.84||-4.04||-14.22||-25.00||-9.34|
|Franklin Square Investment Corp||(NYSE:FSIC)||8.99||9.17||9.73||98.0||92.9||80.8||9.8||9.64||1.01||2.00||4.48||-9.00||-8.86||0.00||-7.43|
|Full Circle Capital Corporation||(FULL)||2.47||2.58||16.28||123.5||85.7||77.9||11.2||4.00||0.69||4.45||8.70||-19.05||-14.71||-47.50||-31.39|
|Gladstone Investment Corporation||(NASDAQ:GAIN)||7.67||7.02||10.68||105.6||102.7||106.2||8.7||9.05||0.81||-8.47||-6.03||-1.39||-3.03||4.17||1.29|
|Garrison Capital Inc.||(NASDAQ:GARS)||12.17||10.73||13.05||97.9||92.7||78.3||10.0||14.92||0.77||-11.83||-8.96||-8.92||-14.61||0.00||-10.27|
|Golub Capital BDC, Inc.||(NASDAQ:GBDC)||16.63||17.31||7.39||99.2||97.7||107.8||8.1||15.80||1.09||4.09||6.01||-3.01||-3.35||0.00||2.19|
|Gladstone Capital Corporation||(NASDAQ:GLAD)||7.31||7.45||11.28||100.0||100.0||95.8||10.0||9.06||0.89||1.92||4.79||0.00||-1.96||0.00||-9.99|
|Goldman Sachs BDC||(NYSE:GSBD)||19.00||19.60||9.18||88.7||86.1||84.1||9.5||19.46||1.03||3.16||5.53||-1.46||-6.65||0.00||-2.67|
|Harvest Capital Credit||(NASDAQ:HCAP)||11.73||12.17||11.09||90.0||93.1||87.8||9.5||14.27||0.85||3.75||6.63||5.63||-1.69||0.00||-2.33|
|Share Price||Div/||Div/||Div/||Div/||Q4-15||Price||YTD Percent Change||LTM||LTM|
|Horizon Technology Finance Corp||(NASDAQ:HRZN)||11.73||11.61||11.89||98.6||97.9||110.4||10.0||13.94||0.84||-1.02||1.92||-1.41||-0.36||0.00||-3.55|
|Main Street Capital Corporation||(NYSE:MAIN)||29.08||31.35||6.89||99.5||95.6||99.1||10.2||21.79||1.48||7.81||9.66||-7.66||-4.57||5.88||1.87|
|Medley Capital Corporation||(NYSE:MCC)||7.52||6.60||18.18||106.2||104.3||101.0||12.0||11.00||0.66||-12.23||-8.24||-8.13||-20.41||0.00||-14.74|
|Monroe Capital Corporation||(NASDAQ:MRCC)||13.09||13.85||10.11||89.2||90.3||86.6||9.9||14.21||0.98||5.81||8.48||-2.48||-4.69||0.00||1.00|
|New Mountain Finance Corporation||(NYSE:NMFC)||13.02||12.64||10.76||97.8||97.1||107.5||10.4||13.73||0.97||-2.92||-0.31||-2.80||-9.13||0.00||-5.42|
|OFS Capital Corporation||(NASDAQ:OFS)||11.48||12.95||10.50||91.9||80.5||98.1||9.2||14.46||0.88||12.80||15.77||0.00||1.81||0.00||3.65|
|Oak Hill Advisors||(NASDAQ:OHAI)||3.80||3.39||14.16||129.7||111.6||97.8||8.7||6.71||0.62||-10.79||-7.63||-13.95||0.00||-25.00||-26.60|
|Prospect Capital Corporation||(NASDAQ:PSEC)||6.98||7.27||13.76||96.2||100.0||96.8||10.2||10.17||0.74||4.15||7.74||1.96||-16.11||0.00||-4.83|
|PennantPark Floating Rate Capital||(NASDAQ:PFLT)||11.25||11.70||9.74||115.2||96.6||122.0||8.3||13.95||0.85||4.00||6.53||-1.98||-2.13||5.56||-3.04|
|PennantPark Investment Corp||(NASDAQ:PNNT)||6.18||6.06||18.48||106.7||112.0||104.5||12.4||9.82||0.67||-1.94||2.59||3.96||-16.17||0.00||-13.52|
|Saratoga Investment Corp.||(NYSE:SAR)||15.42||15.68||8.42||69.5||69.8||69.2||5.8||22.42||0.69||1.69||3.83||-2.56||-12.50||50.00||-0.66|
|Stellus Capital Investment||(NYSE:SCM)||9.64||10.22||13.31||101.5||99.3||111.7||10.3||13.62||0.77||6.02||9.54||0.75||-2.48||0.00||-5.38|
|Solar Capital Ltd.||(NASDAQ:SLRC)||16.43||17.28||9.26||95.8||90.9||105.6||7.7||21.52||0.83||5.17||7.61||-4.02||-4.63||0.00||-5.71|
|Solar Senior Capital Ltd.||(NASDAQ:SUNS)||14.90||14.58||9.67||99.3||100.0||105.8||8.6||17.06||0.89||-2.15||0.22||0.71||-6.06||0.00||-7.48|
|Medallion Financial Corp.||(TAXI)||7.04||9.23||10.83||87.7||84.0||65.9||8.8||11.37||0.81||31.11||34.66||-10.94||0.00||4.17||2.33|
|Triangle Capital Corp||(NYSE:TCAP)||19.11||20.58||10.50||101.4||91.9||100.0||14.2||15.48||1.35||7.69||10.52||-6.99||-1.92||0.00||-5.46|
|TCP Capital Corp.||(NASDAQ:TCPC)||13.93||14.91||9.66||91.7||89.4||88.2||9.7||15.10||1.01||7.04||9.62||-4.27||-7.70||0.00||-1.53|
|THL Credit, Inc.||(NASDAQ:TCRD)||11.70||10.83||12.56||97.1||95.8||96.1||10.8||13.03||0.86||-7.44||-4.53||0.00||-7.06||0.00||-3.82|
|TICC Capital Corp.||(NASDAQ:TICC)||6.08||4.80||24.17||227.5||246.8||167.8||18.1||7.81||0.75||-21.05||-16.28||-28.17||-25.00||7.41||-25.93|
|TriplePoint Venture Growth||(NYSE:TPVG)||11.96||10.50||13.71||101.4||86.7||96.1||10.1||14.52||0.74||-12.21||-9.20||-15.48||7.46||0.00||-2.74|
|TPG Specialty Lending||(NYSE:TSLX)||16.22||16.13||9.67||93.4||92.3||88.4||10.3||15.62||1.06||-0.55||1.85||-0.60||-3.83||0.00||-2.45|
|With the 10 Treasury at 1.75% and sector average yield on Q1 dividends at 12.15% - the spread is 1040 bps.|
|The cap weighted ETF BDCS has a price change of -0.74% year to date - with dividends its total return is 1.51%.|
|The SPY or S&P 500 EFT is 0.81% year to date. - and with unreinvested dividends is 1.32% year to date.|
BDC Earnings Growth & P/E Ratios 03-31
Fiscal and calendar years are not in sync. BDCs than began fiscal 2016 on or before calendar Q4-15 include AINV, FULL, FSC, GAIN, GBDC, GLAD, MCC, PSEC, PFLT, and PNNT. The range metric is the high estimate minus the low estimate, with that result dividend by the consensus estimate -- and serves as one of several measurements for assessing risk. All earnings projections (which are NII or net investment income numbers) are from Yahoo Finance.
|Earnings / Share||Earn. Growth||P/E Ratios||Current Fiscal Year|
|Earnings / Share||Earn. Growth||P/E Ratios||Current Fiscal Year|
The first data parsing:
The Predictive Power of the Dividend/EPS Ratios on Valuations: Dividend to EPS ratios (or dividend to earnings ratios -- where I will use NII or net investment income for the earnings metric) range from as low as the 70s to 220s at 3-31-16 and may look all too random. But this ratio - during most time periods -- helps explain the variety of yields, price to book ratios, and price to NII ratios. There is some correlation to YTD price changes as well. This first test is done for BDCs with weighted average portfolio yields of more than 10% in Q4-15. The dividend stats are from Q1-16 and the current EPS projections are for 2016. Dividend cutting BDCs are not included in this data. Lower risk BDCs have their metrics shown separately.
The following dividend paying BDCs had Q1-16 Dividend/EPS ratios of less than 93%: BKCC, CMFN, FDUS, GSBD, HCAP, MRCC, OFS, SAR and TCPC. Their YTD mean price change = 3.50% and 8 of the 9 beat the sector mean yearly price change of -0.52%. Their mean yield = 10.50% and they sold at an average Price/Book ratio = 0.90 and an average Price/NII ratio = 8.52.
The following BDCs had Q1-16 Dividend/EPS ratios of more than 93% - but less than or equal to 100%: ABDC, AINV, ARCC, CPTA, FSC, FSIC, GARS, HRZN, MAIN, NMFC, PSEC, SLRC, TCRD and TSLX. Their YTD mean price change = -1.13% and 7 of the 14 beat the sector mean yearly price change. Their mean yield = 11.71% - and they sold at an average Price/Book ratio = 0.88 and an average Price/NII ratio = 8.69.
The following companies had Q1-16 Dividend/EPS ratios of more than 100% but had 2017 Dividend/EPS ratios under 100%: HTGC, SCM, TCAP and TPVG. Their YTD mean price change = 0.01% and 2 of the 4 beat the sector mean yearly price change. Their mean yield = 11.96% - and they sold at an average Price/Book ratio of 1.02 and an average Price/NII ratio of 8.61. (This data grouping broke the trend of having lower Price/Book ratios for BDCs with lower coverage. The inclusions of two internally managed BDCs - which historically sell at higher valuations - skewed that ratio. The ratio average for SCM and TPVG is 0.755.)
The following companies had Q1-16 Dividend/EPS ratios of more than 100% and 2017 Dividend/EPS ratios of more than 100%: GAIN, GLAD, KCAP, MCC, OHAI, PNNT and WHF. Their YTD mean price change = -7.52% and 1 of the 7 beat the sector mean yearly price change. Their mean yield = 14.73% - and they sold at an average Price/Book ratio of 0.72 and an average Price/NII ratio of 7.92.
The BDCs that had weighted average portfolio yields of less than 9% and dividend coverage (the lower risk group): ACSF, FSFR, GBDC, SUNS and TAXI. Their YTD mean price change = 5.52% and 3 of the 5 beat the sector mean yearly price change of -0.52% Their mean yield = 10.16% - and they sold at an average Price/Book ratio = 0.83 and an average Price/NII ratio = 9.73.
The BDCs that had weighted average portfolio yields of less than 9% but lacked dividend coverage: FULL, PFLT and TICC. Their YTD mean price change = -4.20% and 2 of the 3 beat the sector mean yearly price change. Their mean yield = 16.73% - and they sold at an average Price/Book ratio = 0.70 and an average Price/NII ratio = 9.61.
The evidence for buying a covered dividend as well as avoiding the purchase of uncovered dividends is evidence in the 2016 numbers. But how has this worked over the long term? The following spreadsheet contains that data:
|Year||Best Coverage||2nd Best Coverage||Next Year Coverage||No Coverage|
|2013||+16.37%||+ 2.65%||- 0.43%|
|Q1-16||+ 3.50%||- 1.13%||+ 0.01%||- 7.52%|
Did every BDC with superior coverage out perform? No. Did every BDC lacking coverage under perform? No. But as rules of thumb go, this is a strongly performing rule.
Let's move on to the next key BDC metric.
The Importance of NAV Growth in the last quarter The following companies had NAVs that rose more than 2% from Q3-15 to Q4-15: OFS. Its mean price change for the year 2016 is 12.80%. and 1 of the 1 beat the sector median yearly price change.
Its mean total return for the year is 15.77%, and 1 of the 1 beat the sector median yearly price change. 1 of the 1 had dividend coverage.
The following companies had NAVs that rose from Q3-15 to Q4-15, but rose less than 2%: FDUS, GBDC, SAR and TAXI. Their mean price change for the year 2016 is 12.54%. Their mean total return for the year is 15.16% - and 4 of the 4 beat the sector median yearly price change. 3 of the 4 had dividend coverage.
The following companies had shrinking NAVs of less than 4%: ABDC, AINV, ARCC, GSBD, HCAP, HRZN, HTGC, MAIN, MRCC, PSEC, PFLT, SCM, SLRC, TCAP, TCPC, TCRD, TPVG and TSLX. Their mean price change for the year 2016 is 2.37%. Their mean total return for the year is 5.17% - and 13 of the 18 beat the sector median yearly price change. 13 of the 18 had dividend coverage.
The following companies had shrinking NAVs of more than 4%: ACSF, BKCC, CMFN, CPTA, FSC, FSFR, FSIC, FULL, GAIN, GARS, GLAD, KCAP, MCC, NMFC, OHAI, PNNT, SUNS, TICC and WHF. Their mean price change for the year 2016 is -6.72%. Their mean total return for the year is -3.5% - and 5 of the 19 beat the sector median yearly price change. Also 10 of the 19 had dividend coverage.
The data above is for NAV change in the last quarter. The summary data below uses last twelve month NAV change (or Q3 of the prior year to Q3 of the current year change) for the data from 2012 through 2015.
Historical Price Changes By Degree of LTM NAV Growth:
|Year||Best Growth||Small Growth||Small Fall||Large Fall|
|2013||+23.79%||+ 2.97%||- 2.68%|
|2015||+12.10%||- 7.76%||- 8.24%||-19.14%|
|Q1-16||+12.80%||+12.54%||+ 2.37%||- 6.72%|
There are other metrics that correlate to superior NAV change besides dividend coverage. The current NAV trend; positive trend in "Realized & Unrealized Gains" per share; BDC dividend CAGR (or growth) projections; analyst ratings; along with superior "historical earnings projection accuracy" also correlate to superior NAV change.
The Buy List Currently Suggested by the Numbers
If one were to focus on only the two key metrics of NAV change and dividend coverage, what would the current buy list look like? The list of BDCs with below 96.5% dividend to 2016 NII coverage and LTM NAV change of better than a 3.5% fall are: ABDC, ARCC, BKCC, FDUS, GSBD, HCAP, MRCC, OFS, SAR, TAXI, TCPC and TSLX.
There are problems with that list being a superior buy list. There are too many small cap BDCs with short histories in that list. None of the potentially lower risk BDCs that have large allocations to lower yielding senior secured debt are on that list. Loans for taxi medallions are suspicious collateral in a world with Uber and Lyft. Some on this list have yields that look too dang low. But even with these problems, I would not under weight the power in these two metrics.
ARCC, FDUS, MRCC and TCPC combined are 59% of my BDC holdings. The numbers provide strong evidence that my weighting for members of this list should be higher, and I expect to move in that direction.
I want to end this update with one more valuation observation: Don't ignore BDC gravity (or the force that BDC "portfolio weighted average yields" has on the yield of the BDC equity) when making your valuation assessments. BDCs strongly sell at yields that are close to their portfolio weighted average yield. You are best served buying BDCs with positive metric attributes - but you can pay too much for a good thing. The data:
The Correlation of Weighted Average portfolio yield to BDC yield and weeding out ACSF, FULL, KCAP, OHAI, SAR, TAXI and TICC
The following companies had weighted average yields at or under 9%: FSFR, GBDC, PFLT and SUNS. Their average yield is 9.54%.
The following companies had weighted average yields between 9% and 10%: ARCC, FSIC and MAIN. Their average yield is 8.95%.
The following companies had weighted average yields between 10% and 11%: BKCC, CMFN, FSC, GARS, MRCC, NMFC, SAR, SCM, SLRC, TCPC and TSLX. Their average yield is 11.27%.
The following companies had weighted average yields between 11% and 12%: AINV, GLAD, GSBD, TCRD and WHF. Their average yield is 12.22%.
The following companies had weighted average yields over 12%: ABDC, CPTA, FDUS, GAIN, HCAP, HRZN, HTGC, MCC, OHAI, PSEC, PNNT, TCAP and TPVG. Their average yield is 13.09%.
Use the three tools provided above (dividend coverage, NAV change and gravity) when making your BDC selections, and you will be well on your way to creating a superior BDC portfolio. Keep your BDC allocation percentage light. Don't be a yield hog. Invest with metric awareness. That is what the numbers tell me. And all I have done here is take dictation while the numbers told their story.
Disclosure: I am/we are long AINV, ARCC, FDUS, MRCC, PFLT, PNNT, TCPC.
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.