In a slow growth environment, I continue to believe Business Development Companies (BDC's) should make up a key piece of an income investor's portfolio. These companies are ideally positioned as long as there is liquidity in the credit markets, the domestic economy still grows albeit at a slow pace and the banks continue to reduce their lending to small and medium size firms as they lower their risk profile.
Fifth Street Finance Corp. (FSC) - Fifth Street Finance Corporation is a specialty finance company that lends to and invests in small and mid-sized companies, primarily in conjunction with investments by private equity sponsors.
6 reasons should be strongly considered by income investors at under $10 a share:
- FSC yields 12% and pays out a distribution monthly.
- It is one of the few BDC's whose debt has an investment grade rating from two of the main rating agencies (Fitch and S&P). This lowers the company's cost of capital.
- Insiders have been strong buyers of new shares over the last year. The seven analysts that cover the stock have an $11 median price target on the stock. Deutsche Bank initiated FSC as a "Buy" late last year.
- Analysts expect strong revenue growth for the company over the next couple of years. Predictions call for over 30% sales growth in FY2012 and then increasing over 20% in FY2013.
- In addition to a huge yield, earnings are expected to show some growth. The company made $1.01 in FY2011 and analysts expect it to earn $1.10 a share in FY2012 and $1.17 in FY2013.
- The stock has solid technical support at just under these levels (See Chart).