Buying This 8.1%-Yielding Top-Shelf BDC Is A No-Brainer

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About: Goldman Sachs BDC (GSBD)
by: Achilles Research
Summary

Goldman Sachs BDC remains a "Strong Buy".

Goldman Sachs BDC has a diversified investment portfolio with considerable NII-upside.

Shares sell for a premium to net asset value, which I think is justified given the BDC's above-average dividend coverage stats.

An investment in GSBD yields 8.1 percent.

Goldman Sachs BDC, Inc. (GSBD) is a top-shelf business development company with above-average dividend coverage stats. The business development company relies on a defensively-positioned investment portfolio and has considerable net interest income upside in a rising rate environment. Goldman Sachs BDC easily outearns its dividend with net investment income, and shares continue to sell for a reasonable run-rate NII-multiple. An investment in Goldman Sachs BDC yields 8.1 percent.

Goldman Sachs BDC - Portfolio Overview

Goldman Sachs BDC's debt investment portfolio largely consists of secure first and second liens. First and second liens together represented ~89 percent of Goldman Sachs BDC's investment portfolio at the end of Q2-2018. The BDC also invests a smaller portion of its funds into investment funds/vehicles and common and preferred equity.

Here's a portfolio breakdown by asset type.

Source: Goldman Sachs BDC Investor Presentation

Goldman Sachs BDC has investments in 59 portfolio companies with a median EBITDA of $36.7 million. The entire investment portfolio was valued at $1.24 billion at the end of the June quarter, based on fair value.

Source: Goldman Sachs BDC

Goldman Sachs BDC further has good credit quality. At the end of Q2-2018, just 0.7 percent of total investments were on non-accrual status.

Here are Goldman Sachs BDC's investments on non-accrual status over the last five quarters (based on fair value).

Source: Achilles Research

The good news is that Goldman Sachs BDC has considerable net interest income upside as long as the Federal Reserve keeps pushing interest rates higher. This is because the business development company aggressively invested into floating-rate assets in the last several years. Today, a whopping 96 percent of Goldman Sachs BDC's investments are tied to variable interest rates.

Source: Goldman Sachs BDC

The Dividend Has A High Margin Of Dividend Safety

Goldman Sachs BDC has above-average dividend coverage stats, which in turn translates into a high margin of dividend safety.

The business development company earned a quarterly average of 0.53/share in net investment income in the last twelve quarters, which compares favorably to a quarterly dividend payout of $0.45/share.

Goldman Sachs BDC's dividend coverage ratio averaged 117 percent, indicating that the dividend is indeed quite safe.

Source: Achilles Research

Valuation

Goldman Sachs BDC's shares currently sell for ~11.1x Q2-2018 run rate net investment income, and ~1.23x net asset value. GSBD deserves to be priced at a premium to NAV, in my opinion, due to its excellent dividend coverage stats.

And here's how GSBD compares against other BDCs in the sector in terms of P/NAV-ratio.

Chart GSBD Price to Book Value data by YCharts

Risk Factors Investors Need To Consider

Major risk factors include:

  • A U.S. recession.
  • An increase in non-performing investments.
  • A deterioration in dividend coverage stats.
  • A slower pace of interest rate hikes.

Your Takeaway

Goldman Sachs BDC makes a strong value proposition for income investors: The business development company easily outearns its dividend with net investment income and it has considerable NII-upside in a rising rate environment thanks to its large investments into floating-rate assets. The investment portfolio is also defensively-positioned and has low non-accruals. Shares are reasonably valued given the investment proposition. Buy for income and capital appreciation.

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Disclosure: I am/we are long GSBD, ARCC, MAIN. 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.