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Why 9.2%-Yielding Hercules Capital Is Still A Strong Buy

Aug. 03, 2018 5:46 PM ETHercules Capital, Inc. (HTGC)16 Comments
Achilles Research profile picture
Achilles Research


  • Hercules Capital remains a compelling income vehicle for high-yield investors.
  • The business development company covers its dividend, on average, with NII and DNOI. Hercules Capital further has interest rate upside.
  • Hercules Capital has a moderate degree of dividend safety.
  • Hercules Capital's income stream sells for a premium to NAV, which is justified, in my opinion.
  • An investment in HTGC yields 9.2 percent.

Hercules Capital, Inc. (NYSE:HTGC) remains a "Strong Buy" after the business development company released earnings for the second quarter yesterday. Hercules Capital has covered its dividend payout with net investment income and distributable net operating income, on average, in the last three years, and the BDC has considerable net interest income upside in a rising rate environment. Shares change hands for a justified premium to net asset value. An investment in Hercules Capital at today's price point yields 9.2 percent.

Hercules Capital - Overview

Hercules Capital is a tech-focused business development company with an equity value of ~$1.3 billion and a ~$1.6 billion debt investment portfolio. The business development company largely invests in innovative venture growth-stage companies in the technology, life sciences and sustainable and renewable technology industries.

Here's a company and portfolio snapshot.

Source: Hercules Capital Investor Presentation

Hercules Capital has seen strong asset and income growth in recent years, partly because banks have pulled back from high-risk lending after the financial crisis a decade ago.

Business development companies such as Hercules Capital have captured significant market share since, which has been reflected in a steady increase in portfolio assets and associated portfolio income.

Source: Hercules Capital

Importantly, Hercules Capital has produced strong returns for shareholders. The business development company outperformed its BDC peer group in terms of returns on equity in four out of the last five years.

Source: Hercules Capital

Interest Rate Upside

One of the most attractive features of an investment in HTGC is that the BDC has interest rate upside in a rising rate environment.

Management expects that a 25 basis point increase will benefit Hercules Capital's net interest income by $0.04/share annually. Since the Fed has become increasingly aggressive in terms of raising interest rates in 2018, Hercules Capital is a preferred income vehicle to hold during

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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