BDCs' Recent Dividend Performance

by: Nicholas Marshi

As the first quarter of 2010 comes to a close, we thought it would be interesting to review a few key statistics about the performance of the Business Development Company (BDCs) industry, or at least the 21 public companies we track. We have a mound of data we compile, but we have chosen to look at the industry's dividend paying performance and recent history. (By the way, please note we count Compass Diversified (NYSE:CODI) as a BDC for these purposes). For the complete list of the companies we track, check out our website at BDC (We're in the process of doing a major overhaul of the website so excuse the mess).

We had a look at dividend announcements for the quarter. As registered investment companies (RIC), BDCs are obligated to pay out the bulk of their earnings in the form of distributions. The amount and trend of those dividends (whether the pay-outs are up, down or unchanged from prior periods) can speak to the relative health of the industry. Last year in the first quarter, nine of the 21 BDCs reduced or suspended their dividends when compared with the prior quarter. In fact, that was the highest level of dividend reductions in any quarter since the inception of the industry. Two BDCs increased their dividends in the first quarter of 2009 and nine were unchanged.

This year - as one might expect - the results are much rosier. To date, 14 companies have made a first quarter 2010 dividend announcement. Of these, three were for a higher dividend than in the prior period (i.e. fourth quarter 2009), nine were unchanged and two were down. (Still, four BDCs have suspended regular dividends or 20% of the sector.)

We have looked at the remaining seven companies that have not yet reported first quarter 2010 pay-outs (these are ACAS, GNV, KED, MCGC, TAXI and CODI) and assumed that all of them will leave their dividends unchanged. If we're right, this suggests the final dividend scorecard for the first quarter of 2010 will see three BDCs with increased dividends, 15 unchanged and two with decreases. We're leaving Allied out of these calculations because the company is about to no longer exist. (There is a chance MCG Capital will renew paying a dividend in the first quarter of 2010 after a two year hiatus, but we're playing it safe and assuming the dividend remains at nil).

For those of you keeping score at home, the BDCs which have announced increases are Fifth Street Finance (FSC), Pennant Park (NASDAQ:PNNT) and Prospect Capital (NASDAQ:PSEC). The first two had substantial increases: 11% and 4% respectively. PSEC's increase was nominal at 0.3%. As for the dividend reducers: Hercules Technology (NASDAQ:HTGC) cut its pay-out from $0.30 to $0.20 and Kohlberg Capital from $0.20 to $0.17.

We project that the aggregate dividends for all 21 companies (not incuding the non-recurring special dividend to received by Allied Capital's shareholders for approving the merger with Ares Capital) will be $4.52. That's 90% of the aggregate dividends for the same universe of companies a year ago, and 97% of the amount distributed in the fourth quarter of 2009 after deducting the special dividend of GSC Investments (GNV), which was a one time thing. The bottom seems to have been in the second quarter of 2009 when aggregate dividends were at $4.41.

If we look at the data,though for a slightly longer period we can see that the BDC industry is a long way from returning to its dividend paying heights of a couple of years ago. In fact, it was back in the first quarter of 2008, just as the recession was beginning, that dividends peaked. Using the same 21 companies, dividends aggregated $8.53. That suggests the $4.52 in dividends we're projecting for the first quarter of this year is 47% down from two years ago.

Things don't look quite as bleak,though, if we don't count the four BDCs which have suspended their dividends (ACAS, ALD, MCGC and GNV). Then the aggregate pay-outs have dropped just 25% from the height of two years ago.

We don't feel we have a clear enough handle on 2010's outlook to hazard a guess at to what dividend levels will be a year from now. We know Allied Capital will be off our list and submerged into Ares Capital. We will take a stab at an industry projection for the first quarter of 2011 dividends after reviewing the first quarter 2010 earnings which will be dribbling in in the weeks ahead.

Disclosure: Author holds long positions in ARCC, AINV, BKCC. FSC, HTGC, GNV, MAIN, MCGC, PNNT, PSEC, TICC, TCAP and CODI and holds no positions in ALD, ACAS, GLAD, KED, NPGC, TAXI, KCAP and GAIN.