Sourced from PBR archives:
Barings BDC (NYSE:BBDC) is firming up as a good investment just like the Bering Sea ‘firms-up’ yearly
On January 29th, 2019, I shared my first SA article relating to Barings BDC, a new operating company created when MassMutual folded several operating units into one operating unit after purchasing the assets of the former Triangle Capital Corporation.
The title I gave the first article was – Baring BDC: Is Now the Time to Be Daring and Invest in Barings? In the article, I attempted to make the case for one considering this business development corporation as a favorable place for placing one’s investment funds. I further supported my enthusiasm for the company by pointing out that I already owned a position with my original investment in the former Triangle, and furthermore I had added to my position at the then price of $9.60.
The merger and creation of this new operating company was completed on August 3rd, 2018. Based on this event’s date it was the 4th quarter before we saw a full quarterly report reflecting the business model of the new entity. This 4th quarter report showed what I consider outstanding results. Results that gave me confidence to add more shares in the interim period before the 1st quarter 2019 report was released last Friday. YTD, the stock has gained from $8.90 to the current new high ($10.33) that Barings closed today - 5/14/2019. This translates into a nifty 16% gain for this time frame where we have seen considerable volatility in middle market business development funding corporations.
When Barings conducted their quarterly report conference call last Friday (5-10-219), they had seven analysts on their call. Most of these analysts represent major brokerage firms. It apparently took a few days for these analysts to digest the detailed information, but based on the price movement in the stock, their conclusion apparently parallels what I learned from the conference data. During Friday’s trading, the stock moved up from $9.94 to break and close above $10.00, at $10.08. Then on Monday (5/13/2019), while the overall market was in a massive 600+ decline in the DJIA, the stock moved up to $10.17. The stock followed up the next day by adding another $0.16 to the stock’s valuation.
The 9.4% increase in the price over the interim of the 1st quarter filing is based on the following key factors from their report:
* NAV increased by 4.9% to $11.52
* Current price of $10.33 indicates the stock is trading $1.19, or 10%, under the NAV
* Quarterly investments totaled $65 million
* Total value of their middle market portfolio increased to $289 million
* Net investment income was $0.16 a share, beating projected earnings by $0.03
* The $0.16 net quarterly earnings easily covered the $0.12 dividend paid in the 1st quarter leaving a nice balance of $0.04 in reserve.
Going Forward Key Events:
* Barings announced the 2nd quarter dividend will be increased to $0.13, an increase of 8.33% from the current $0.12 dividend.
* Based on the 4th quarter 2018, quarterly dividend of $0.10, under Barings' control of the company, they have increased the quarterly dividend by 30%.
* Their stated goal is to pay out dividends with the desired amount being an 8% return.
* Based on the current $10.33 share price, this would indicate the planned dividend of 8% would generate a yearly dividend of approximately $0.80. Based on these assumptions, the current $0.13 dividend would generate $0.52 a year in dividends for shareholders. This would require Barings increasing the current dividend by another $0.28 to achieve the desired 8% rate.
Will the current ability to raise the dividend, based on the two quarters under Barings’ leadership continue at the same rate equaling 30% growth for the future comparable time frame? There is no guarantee this will happen, but we know based on the two historical full quarters of operations management has generated net earnings that have easily covered their dividend and left a balance unpaid out as a dividend. But if my earlier readers had followed my suggestion when the stock was trading for $9.60, the current payout rate would be a generous payout of 5.4%, while we await the further increase in the dividend payout. And we can’t ignore the capital appreciation of 7.6% since my original article.
Key New Joint Venture Announced With 1st Quarter Conference Call:
During the recent 1st quarter conference call, Barings announced a joint venture with the South Carolina Retirement System - SCRS. This alliance plans to fund the deal with about $550 million, with $50 million funded by Barings and the balance of $500 million coming from SCRS. The overall plans are built around an asset mixture of liquid and illiquid credit structured products and real estate debt.
With Barings’ short-term operating history, I think it's important to see such an entity with such a large pool of funds to invest has chosen Barings for their expertise in the investing arena Barings specializes.
Overall Strategy For Barings:
When the new entity of Barings BDC was created in late 2018, the initial plan was to place their capital funds into a portfolio of syndicated loans. From this position they planned to transition their capital into a portfolio of mid-market loans over ensuing months and quarters. At this stage, my firm belief is that Barings is moving forward in a very positive manner with a clear eye on the ball where they will allocate their capital.
Stock Repurchase Plan:
One of the key strategies Barings outlined for investors, I shared in my original article where Barings would structure their operating plans based on being co-investors with the regular retail investors. This plan was to have a stock repurchase plan that would enhance the corporate profits along with the regular investors. This program was outlined in 2018, and investors have seen these repurchases having happened on a constant basis and are still taking place. In the following graph, one can see the purchases have been timely and at levels well below the NAV for the underlying stock.
As an investor seeking a generous and growing dividend, I’m highly pleased with this aspect of Barings' strategy to increase shareholders' capital assets. Seeing management aligning their stock ownership with the retail investors is a feature that I think is needed by more firms.
At this point, I’ve been impressed with the business strategy planned by Barings' management team. There is no guarantee the current successes will continue. Please review the points I mentioned within the original article I shared about Barings then look at the results we are seeing unfold as of the 1 st quarter, 2019. Use my points as a starting point for applying your own due diligence criteria. Keep in mind that the overall market YTD has seen a huge swing in overall market prices with the 600-point decline on Monday showing the volatility within the market.
The current elongated standoff in the trade war between China and the United States is a serious issue that must be resolved, soon. We have seen one of our major trading exports being exacerbated to the tune of billions of dollars in agricultural products going to China. The current solution for this now long-term standoff resulted in our President paying out direct payments of $12 billion last year to those impacted by their inability to sell their agricultural product to China.
Now that the stalemate continues into the 2019 planting season, he is now promising another $15 billion in taxpayer-funded largesse. If we want to continue boasting about our free market economic system, picking out a single segment of the market for bailing out makes it a hypocrisy for one thinking we have a free market economic system. The last thing we need in this tit-for-tat gamesmanship effort is for China selling a large portion of our US debt instruments they hold. That would be a disaster!
I wouldn’t take a full position in Barings’ stock as the recent news has probably already been baked into the share price. I would take a small position as we move forward to the June dividend payment and then add more as we approach the 2nd quarter results.
Good luck with your future investment decisions!
Disclosure: I am/we are long BBDC. 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.