Protected Principal Retirement Strategy: BDC Update

Includes: MCC, OXSQ, PSEC
by: Akaralph

In an article on January 11 (here) I discussed the three business development companies (BDCS) that I favored going forward. Now that we have new earnings for two, and updated guidance from the third I would like to discuss the data and update my thoughts going forward.

Prospect Capital (NASDAQ:PSEC)

I have to admit, Prospect Capital is my top pick in the (BDC) arena. This past Thursday it announced earnings for the quarter ended December 31, 2012. Net investment income (NYSEMKT:NII) increased from $36.5 million, or $.33 from December 2011 to $99.2 million, or $.51. This equates to a NII increase of 55 percent.

The net asset value (NAV) per share increased by $.12 to $10.82.

PSEC's NII easily covers the current monthly dividend of approximately $.1105. Commensurate with this earnings announcement it indicated incremental monthly dividend increases going forward.

The link to their earnings announcement is (here).

I note that analysts' have increased PSEC's earnings estimates for 2013 to $1.50.

TICC Capital (TICC)

On January 23, TICC Capital announced preliminary estimates for fourth quarter 2012 earnings (here). Net investment income should be around the $.24 level, which would be below analyst's estimates of $.27.

TICC included an estimate of NAV falling between $9.80 - $9.95 or the quarter ending December 31, 2012.

Analyst's estimates for 2013 NII remain at $1.22.

Despite quarterly NII falling shy of completely covering the quarterly dividend, it is arguably unlikely that we will see a dividend cut.

Medley Capital Corporation (NYSE:MCC)

Our final portfolio position is Medley Capital . On February 6, Medley announced its earnings results for the quarter ended December 31, 2012 (here).

MCC announced NII of $.39 a share, $.03 better than analysts' estimates.

NAV for the fourth quarter was $12.69 (an increase of $.17), and the $.36 quarterly dividend was maintained.

Analysts' estimates for 2013 were raised a bit, from $1.45 to $1.47.


Looking at three of the key metrics for BDC's (2012 Dividend/Earnings Per Share ratio, the forecast 2013 Dividends/Earnings Per Share ratio, and the Price/NAV), we can make the following comparisons:

BDC 2012 Div/EPS* 2013 Div/EPS Price/NAV
PSEC 80.1% 88.7% 1.06
TICC 100.0% 95.1% 1.05
MCC 102.9% 98.0% 1.22

* Using Most Recent Earnings And Dividend Data.

Ideally, I would like to see the Div/EPS ratio at 100 percent or lower, and the Price/NAV ratio be 1.00 or lower.

It seems that the Price/NAV ratios for the universe of BDC's that I follow have been slowly climbing over the past few months, to the point where the present average is higher than that of Prospect and TICC Capital, but still remains lower than that of Medley Capital.

It must be noted that while these metrics are important when analyzing BDC's, they are not the only metrics to be evaluated before making the decision to commit funds to this sector.


I continue to hold a small position in Medley Capital in the Protected Principal Retirement Strategy portfolio, a slightly larger position in TICC Capital, and have this week increased the position in Prospect Capital to the heaviest weighting.

While I remain cautious of the markets longer term, my short to intermediate term confidence in the BDC sector has increased somewhat.

Disclosure: I am long PSEC, TICC, MCC. 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.

Additional disclosure: The information presented in this article constitutes neither a buy nor a sell recommendation for any of the stocks mentioned.