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10.3%-Yielding Hercules Capital Is A Buy Right Now

Achilles Research profile picture
Achilles Research


  • Hercules Capital makes an attractive value proposition as a BDC income play.
  • Strong portfolio yields and dividend coverage stats support an investment in Hercules Capital.
  • Positive interest rate sensitivity is an attractive property, improving the investment thesis further.
  • An investment in HTGC yields 10.3 percent.

Hercules Capital, Inc. (NYSE:HTGC) continues to make a good value proposition for income investors seeking high, stable dividend income from a tech-focused BDC play. Hercules Capital has covered its dividend payout, on average, with net investment income and distributable net operating income. Hercules Capital continues to exhibit positive interest rate sensitivity, making it a promising income vehicle during the current rate hiking cycle. An investment in Hercules Capital currently yields 10.3 percent.

Like most BDCs, Hercules Capital has not been an investors' favorite lately. Income investors are selling high-yield income vehicles in light of surging bond yields and higher inflation expectations which tend to be viewed as negatives for dividend-paying stocks. That said, though, with interest rates expected to go up this year, it makes sense to put money into stocks that have interest rate upside. Hercules Capital is one such BDC play.

Source: StockCharts

Hercules Capital - A Tech-Focused BDC

Hercules Capital is a tech-focused BDC. The business development company primarily invests money in the technology and life sciences sectors, among others.

Source: Hercules Capital Investor Presentation

Hercules Capital's niche-strategy has been successful as the company has seen consistent growth over the last couple of years. Net investment income and total investment income have both grown at a fast clip since 2011.

Source: Hercules Capital

Double digit income growth is a reflection of Hercules Capital's growing asset base over time.

Source: Hercules Capital

One of the most attractive features of an investment in Hercules Capital is that the business development company has consistently produced stable results for shareholders. For instance, Hercules Capital's effective yields on its debt investments as well as its core portfolio yields have been in a narrow range in the last ten quarters.

Source: Achilles Research

Positive Interest Rate Sensitivity

Another attractive property is that the

This article was written by

Achilles Research profile picture
I am a dividend investor and look for undervalued investments in the stock market. I identify misunderstood and undervalued equity investments and hold those securities until their price approximates my estimate of intrinsic value. I am a long-term investor only. I am building a $100,000 high-yield income portfolio. I am running this portfolio as an experiment to see if long-term sustainable income can be generated from a diversified pool of high-risk, high-yield securities. I am willing to accept high risk in order to meet my performance goals.

Analyst’s Disclosure: I am/we are long HTGC. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (24)

I like the high yield, but would trade off a percent of yield for a penny of annual dividend growth. My interest in the issue was based on it offering exposure to smaller tech-venture equity which my portfolio needs. I sold out on the first whiff of going to externalization, I have subsequently built back the position, but I have lost a lot of respect for management and I think they will try to sneak externalization thru later this year. If so, I will permanently draw a line thru HTGC.
HIDIVYNJ profile picture
David, If there is NO div growth but my present yield is 10.70% and there is good NII Div Cov I really couldn't care. Fact is, I wish this on all of my holdings, a STEADY 10.70% Yield. The income for me is more than I could ever spend. We should all be blessed with a steady income of 10.70%
Fast Track to Financial Independence profile picture
Triple like!
David Freilich profile picture
Yes, I acknowledge the yield, and I am a shareholder too.....
David Freilich profile picture
A note before buying: There is little to no dividend growth in this company, however you will receive a high annual yield......
David - Since this is a BDC, and dividends are directly driven by earnings, my understanding is that dividends cannot remain static in a rising earnings environment. HTGC cannot increase revenue but leave dividends to lag at a fixed $ amount like non-BDCs could. So to me this would indeed result in an increasing dividend amount, contrary to what you noted.
Of course, if we see lower earnings the opposite would be true, but since you asknowledged you're a holder I'm guessing that (like me) you don't generally expect this anytime soon.

Just my 2c.
HIDIVYNJ profile picture
Picked up some HTGC in the early AM at 11.58 and it closed at 11.92. Not bad, I can skip Wendy's tonight.
Once the management stuck its nose into the cookie jar for grabbing more for themselves without any benefit for shareholders I among many sold my shares. While the stock price crash caused them to withdraw the proposal my put is that they are just waiting for the "right" time to do this again. The capital loss if they do this is not compensated by the dividend. I'll pass on this sucker yield.
ArtfulDodger profile picture
I'm with you Eagle. Good point. AD
Nostradumbass profile picture
Good article. A very interesting BDC. Management has learned its lesson on externalization, at least, for now. Long HTGC.
Hgtc is one of the best BDC’s positioned for rising rates with nearly all loans at variable rates and nearly all debt at fixed rates. If rates go up 1%, NII increases by 11%. I doubt that many borrowers would go into bankruptcy for a nominal increase of rate of 1-2%. Over 3%, maybe.
HIDIVYNJ profile picture
HTGC is going ex tomorrow, get a good buy and you get ~ 10.69%. Stk is selling at a Premium, Z stat 1 yr = -1.44 , NII COV = 102.8%, Mat 2.56 yrs. I didn't see what % of the portfolio is Floating Rate Loans and what is the Credit rating of said portfolio assets? Muy importante
Non accruals are less than 1% of portfolio.
Fast Track to Financial Independence profile picture
I think this article should have mentioned the externalization of management issue, which cratered the share price some time ago and may return in the future. If it does come back, it will likely be on reasonable terms second time around, but it would still reactivate latent anger towards management among retail investors.
psuballer31 profile picture
He did mention it, but didn't go into great detail about the background or its implications.
Fast Track to Financial Independence profile picture
Agreed, I have spotted that reference now. So my point would be that it deserved more emphasis.
Never chase yield.
What's the debt schedule look like?
Joseph Hefferon profile picture
agreed, thanks
Is their loan portfolio made up of Adjustable Rate loans, which is the reason that you recommend them as a "buy" in a rising rate environment? I could not find this mentioned in your article. Thanks
NelsonB profile picture
Yes - check press releases and earnings calls from HTGC. Leadership points out exactly how much revenue and NII goes up per each quarter point raise....
thanks, I found it.
ch33s3rs404 profile picture
Rising rates can be double edged. Those paying back Hercules will have to pay higher rates so write offs tend to go up. It also costs more for Hercules to borrow money so while I’m optimistic on the company as well there are concerns in a rising rate environment.
Fast Track to Financial Independence profile picture
Yes, rising rates are beneficial up to a point, and that is the point at which significant numbers of clients can no longer pay and default. This is an issue for STWD also. I'm long both.
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