Ares Capital's NAV, Dividend, And Valuation Versus 14 BDC Peers - Part 2 (Post Q2 2019 Earnings)

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About: Ares Capital (ARCC), Includes: AINV, BDCL, BDCS, BIZD, BLK, FSK, GAIN, GAINM, GBDC, MAIN, MCC, MDLY, NEWT, OAK, OCSI, OCSL, PFLT, PSEC, SLRC, TCPC, TSLX
by: Scott Kennedy
Summary

Part 2 of this article compares ARCC’s recent dividend per share rates, yield percentages, and several other highly unique dividend sustainability metrics to fourteen BDC peers.

This includes a comparative analysis of ARCC’s cumulative undistributed taxable income ratio, percentage of floating-rate debt investments, recent weighted average annualized yield, and weighted average interest rate on outstanding borrowings.

My current buy, sell, or hold recommendation, price target, and dividend sustainability projection for ARCC is stated in the “Conclusions Drawn” section of the article.

My near-term dividend sustainability projection for the fourteen other BDC peers within this analysis is also stated in the Conclusions Drawn section of the article (valuable information for readers).

I also provide a list of the BDC stocks I currently believe are undervalued (a buy recommendation), overvalued (a sell recommendation), or appropriately valued (a hold recommendation).

Author’s Note: PART 1 of this article analyzed Ares Capital Corp.’s (ARCC) recent quarterly results and compared several of the company’s metrics to fourteen business development company (“BDC”) peers. PART 1 helps lead to a better understanding of the topics and analysis that will be discussed in PART 2. The link to PART 1’s analysis is provided below:

Ares Capital's NAV, Dividend, And Valuation Vs. 13 BDC Peers - Part 1 (Post Q2 2019 Earnings)

Focus of Article:

The focus of this two-part article is a very detailed analysis comparing ARCC to some of the company’s BDC peers (all sector peers I currently cover). I am writing this two-part article due to the continued requests that such an analysis be specifically performed on ARCC and some of the company’s BDC peers at periodic intervals. For readers who just want the summarized conclusions/results, I would suggest scrolling down to the “Conclusions Drawn” section at the bottom of each part of the article.

The focus of PART 2 of this article is to compare ARCC’s recent dividend per share rates, yield percentages, and several other highly unique dividend sustainability metrics to fourteen BDC peers. This analysis will show recent past data with supporting documentation within Table 3 below. This article will also project each company’s near-term dividend sustainability which is partially based on the metrics shown in Table 3 and several additional metrics shown in Table 4 below.

By analyzing these metrics, one will better understand which BDC generally has a safer dividend rate going forward versus other peers who have a higher risk for a dividend decrease or a higher probability of a dividend increase and/or a special periodic dividend being declared. This is not the only data that should be examined to initiate a position within a particular stock/sector or project future dividend per share rates. However, I believe this analysis would be a good “starting-point” to begin a discussion on the topic. At the end of this article, there will be a conclusion regarding various comparisons between ARCC and the fourteen BDC peers. In addition, I will provide my current BUY, SELL, or HOLD recommendation and price target on ARCC. I will also include my near-term dividend sustainability projection and current BUY, SELL, or HOLD recommendation for the fourteen other BDC peers within this analysis.

Side Note: As of 9/6/2019, Golub Capital BDC Inc. (GBDC) had a stock price that “reset” lower regarding the company’s quarterly dividend accrual. In other words, this company’s “ex-dividend date” for the quarter has occurred. Gladstone Investment Corp. (GAIN) and TPG Specialty Lending Inc. (TSLX) had a stock price that reset lower regarding each company’s special periodic dividend for the calendar third quarter of 2019.

ARCC, Apollo Investment Corp. (OTC:AINV), FS KKR Capital Corp. (FSK), GAIN, Main Street Capital Corp. (MAIN), NEWTEK Business Services Corp. (NEWT), Oaktree (OAK) Strategic Income Corp. (OCSI), Oaktree Specialty Lending Corp. (OCSL), PennantPark Floating Rate Capital Ltd. (PFLT), Prospect Capital Corp. (PSEC), Solar Capital Ltd. (SLRC), Blackrock (BLK) TCP Capital Corp. (TCPC), and TSLX had stock prices that have not reset regarding each company’s regular September 2019 monthly/quarterly dividend accrual. Medley (MDLY) Capital Corp. (MCC) did not declare a dividend for the calendar third quarter of 2019. Readers should take this into consideration as the analysis is presented below.

Dividend Per Share Rates and Yield Percentages Analysis - Overview:

Let us start this analysis by first getting accustomed to the information provided in Table 3 below. This will be beneficial when comparing ARCC to the fourteen BDC peers regarding quarterly dividend per share rates and yield percentages.

Table 3 – Dividend Per Share Rates and Yield Percentages

Dividend Per Share Rates and Yield Percentages (Source: Table created entirely by myself, obtaining historical stock prices from NASDAQ and each company’s dividend per share rates from the SEC’s EDGAR Database)

Using Table 3 above as a reference, the following information is presented in regards to ARCC and fourteen BDC peers (see each corresponding column): 1) dividend per share rate for the calendar second quarter of 2019 (including any special periodic dividend); 2) stock price as of 6/7/2019; 3) trailing 12-month (“TTM”) dividend yield (dividend per share rate from the calendar third quarter of 2018-second quarter of 2019 [includes all special periodic dividends]); 4) annual forward dividend yield based on the dividend per share rate for the calendar second quarter of 2019 using the stock price as of 6/7/2019 (for monthly dividend payers, the latest monthly dividend per share rate during the quarter); 5) annual forward dividend yield based on the dividend per share rate for the calendar second quarter of 2019 using the NAV as of 3/31/2019 (for monthly dividend payers, the latest monthly dividend per share rate during the quarter); 6) TTM dividend increase (decrease) percentage (for monthly dividend payers, dividend per share rate fluctuation from June 2018-June 2019); 7) dividend per share rate for the calendar third quarter of 2019 (including any special periodic dividend); 8) stock price as of 9/6/2019; 9) TTM dividend yield (dividend per share rate from the calendar fourth quarter of 2018 through the calendar third quarter of 2019 [includes all special periodic dividends]); 10) annual forward dividend yield based on the dividend per share rate for the calendar third quarter of 2019 using the stock price as of 9/6/2019 (for monthly dividend payers, the latest monthly dividend per share rate during the quarter); 11) annual forward dividend yield based on the dividend per share rate for the calendar third quarter of 2019 using the NAV as of 6/30/2019 (for monthly dividend payers, the latest monthly dividend per share rate during the quarter); and 12) TTM dividend increase (decrease) percentage (for monthly dividend payers, dividend per share rate fluctuation from September 2018- September 2019). Let us now begin the comparative analysis between ARCC and the fourteen BDC peers.

Analysis of ARCC:

Using Table 3 above as a reference, ARCC declared a dividend of $0.40 per share for the second quarter of 2019. This amount was unchanged when compared to the prior quarter. ARCC also declared a special periodic dividend of $0.02 for the second quarter of 2019. ARCC’s stock price traded at $17.96 per share on 6/7/2019. When calculated, this was a TTM dividend yield (including special periodic dividends when applicable) of 9.02%, an annual forward yield to ARCC’s stock price as of 6/7/2019 of 8.91%, and an annual forward yield to the company’s NAV as of 3/31/2019 of 9.30%. When comparing each yield percentage to ARCC’s BDC peers within this analysis, the company’s TTM yield based on its stock price as of 6/7/2019 was near average, its annual forward yield based on its stock price as of 6/7/2019 was slightly above average, and its annual forward yield to the company’s NAV as of 3/31/2019 was modestly above average.

When combining this type of data with various other analytical metrics, last November I correctly projected in the following prior ARCC dividend sustainability article the company had a high probability of a dividend per share rate increase during 2019 (including projecting a special period dividend) which ultimately came to fruition:

Ares Capital's Detailed Dividend Sustainability Analysis (Includes 2019 Dividend Projections)

To provide readers several additional, important metrics to consider regarding each BDC’s dividend sustainability, Table 4 is provided below. Again, it should be noted there are additional dividend sustainability metrics that I perform for each company. However, those metrics are more elaborate in detail and require additional analysis/discussion which I believe is beyond the scope of this particular article. That type of analysis would be better suited when analyzing each company on a “standalone” basis versus a comparison article. I have discussed some of these more elaborate metrics in prior ARCC, GAIN, MAIN, NEWT, OCSI, OCSL, PSEC, SLRC, and TSLX articles (see my profile page for links to prior articles regarding those companies).

Table 4 – Several Additional Dividend Sustainability Metrics (6/30/2019 Versus 6/30/2018)

Several Additional Dividend Sustainability Metrics (Source: Table created entirely by myself, partially using data obtained from the SEC’s EDGAR Database [link provided below Table 3])

Using Table 4 above as a reference, a very important metric to consider regarding a BDC’s long-term dividend sustainability is each company’s cumulative undistributed taxable income (“UTI”) outstanding shares of common stock ratio (highly valuable “forward-looking” data). Cumulative UTI is “built up”/retained taxable income (“TI”) in excess of previously paid dividend distributions since an entity’s initial public offering (“IPO”) or after the most recent tax year when an entity overdistributed its TI with no such surplus to offset the difference. This figure/metric has been covered, at length, in previous BDC dividend sustainability articles. To calculate this ratio, I take a company’s cumulative UTIand divide this amount by its outstanding shares of common stock. The higher this ratio is, the more positive the results regarding a company’s future dividend sustainability. Since most BDC peers have continued to gradually net increase their outstanding shares of common stock, this ratio shows if a company has been able to increase its cumulative UTI balance by a similar proportion.

ARCC had a cumulative UTI coverage of outstanding shares of common stock ratio of 1.06 as of 6/30/2019 (see blue reference “C”). When calculated, this was a 0.26 increase during the TTM. Simply put, ARCC continued to have a very attractive taxable income surplus to distribute over the foreseeable future. ARCC’s ratio, both as of 6/30/2018 and 6/30/2019, was notably more attractive versus the mean of 0.30 and 0.35 of the fifteen BDC peers within this analysis, respectively. Only TSLX had a higher ratio as of 6/30/2018 and 6/30/2019. This remains a very positive catalyst/trend to consider and was the main reason ARRC has distributed special periodic dividends throughout 2019 and will likely distribute special periodic dividends during 2020.

In my opinion, another important metric to consider regarding a BDC’s dividend sustainability is a company’s weighted average annualized yield on its debt investments. ARCC had a weighted average annualized yield on the company’s debt investments of 10.40% as of 6/30/2019 (see blue reference “D”). This percentage was slightly above the mean of 10.16% of the fifteen BDC peers within this analysis. More importantly in my opinion, ARCC’s weighted average annualized yield on the company’s debt investments remained unchanged during the TTM without any material change in portfolio characteristics or notable rise in credit risk. This should also be seen as a positive catalyst/trend. This was consistent with the overall trend within the BDC sector due to the gradual increase in the U.S. London Interbank Offered Rate (“LIBOR”) during 2018 (various debt investments still “reset” this past quarter) partially offset by the continued “spread/yield compression” due to the suppression of long-term rates/yields. However, it should be noted this spread/yield compression started to “reverse course” during the second half of 2018 (especially during the fourth quarter of 2018 due to market volatility). As I correctly pointed out last quarter, LIBOR across all tenors/maturities has recently begun to slightly-modestly decrease which will likely temporarily lower this metric across most BDC peers over the next several quarters to varying degrees. This notion has been taken into consideration when it comes to projected dividend per share rates and recommendation ranges provided towards the end of this article.

The next metric shown in Table 4 above is each BDC’s weighted average interest rate on all debt outstanding. ARCC had a weighted average interest rate of 4.09% on the company’s outstanding borrowings as of 6/30/2019 (excludes commitment fees and loan issuance costs; see blue reference “E”). This compared to a weighted average interest rate of 4.17% as of 6/30/2018. When compared to the fourteen BDC peers within this analysis, ARCC continued to have a slightly-modestly below average weighted average interest rate on all debt outstanding. As of 6/30/2019, 31.07% of ARCC’s debt outstanding bore floating-rates (credit facility) while 68.93% of the company’s debt outstanding bore fixed-rates (convertible and unsecured notes). I believe taking a “snapshot” of each BDC’s weighted average interest rate on all debt outstanding allows readers to better understand which companies will experience generalized characteristics in the future (thus impacting future net investment income [NII]/TI).

The last metric shown in Table 4 is each BDC’s proportion of debt investments with floating interest rates (additional forward-looking data). ARCC’s proportion of debt investments with floating interest rates was 93.33% as of 6/30/2019 (see blue reference “F”). ARCC’s percentage was more attractive, during the 2017-2018 rising interest rate environment, when compared to the mean of the fifteen BDC peers within this analysis of 89.03%. This was one reason why ARCC’s NII experienced a fairly consistent, steady growth during 2018 as the Federal (“Fed”) Funds Rate and U.S. LIBOR gradually increased. This was one the main reasons why I originally initiated, and subsequently increased, my position in ARCC during certain periods of market volatility during the latter half of 2018. Simply put, I knew “ahead of time” per se that ARCC’s NII would continue to increase as 2018 progressed. However, as noted above, LIBOR has begun to decrease during 2019. As such, these types of loans will actually eventually experience a net decrease in stated rates when compared to late 2018. I believe this rate of decline will be modest under a “worst-case” scenario. Readers should understand this will likely have a minor negative net impact to NII. Again, the severity of such a decrease will vary from BDC to BDC.

Once again using Table 3 as a reference, ARCC declared a dividend of $0.40 per share for the third quarter of 2019. This was unchanged when compared to the prior quarter. In addition, ARCC declared a special periodic dividend of $0.02 per share for the third quarter of 2019 which was also unchanged when compared to the prior quarter (special periodic dividends totaling $0.08 per share spread evenly throughout the four quarters of 2019). This gets back to the notion ARCC continues to have amble cumulative UTI to distribute net investment company taxable income (“ICTI”) to shareholders.

ARCC’s stock price traded at $18.92 per share on 9/6/2019. When calculated, this was a TTM dividend yield (including special periodic dividends when applicable) of 8.72%, an annual forward yield to ARCC’s stock price as of 9/6/2019 of 8.46%, and an annual forward yield to the company’s NAV as of 6/30/2019 of 9.26%. When comparing each yield percentage to ARCC’s BDC peers within this analysis, the company’s TTM yield based on its stock price as of 9/6/2019 and annual forward yield based on its stock price as of 9/6/2019 was near average while its annual forward yield to the company’s NAV as of 6/30/2019 was slightly above average. This third percentage is not alarming when it comes to ARCC’s dividend sustainability due to the company’s prior accretive acquisitions, attractive borrowing costs, recent notable improvement of NII, and periodic generation of net realized/capital gains.

Various Comparisons Between ARCC and the Company’s Fourteen BDC Peers:

A large number of readers have continued to request that I provide yield percentages, dividend per share rates, and other metrics for the BDC stocks I currently cover in ranking order. As such, using Table 3 and Table 4 above as a reference, the following metrics are provided for ARCC and the fourteen BDC peers within this analysis:

TTM Yields as of 9/7/2018 and 9/6/2019, Respectively (Including Annual Dividend Change; Based on Lowest to Highest Percentage as of 9/7/2018) (Good General Indicator of “Back-Testing” Dividend Sustainability; Exceptions Apply):

1) MAIN: 7.12%; 6.75% (7% Monthly Dividend Increase; 2 Special Periodic Dividends Totaling $0.525 Per Share)

2) OCSI: 7.30%; 7.58% (Stable Quarterly Dividend)

3) GBDC: 7.32%; 7.58% (Stable Quarterly Dividend; 1 Special Periodic Dividend Totaling $0.12 Per Share)

4) NEWT: 7.50%; 8.65% (21% Quarterly Dividend Net Increase)

5) SLRC: 7.52%; 8.00% (Stable Quarterly Dividend)

6) GAIN: 7.78%; 8.45% (Stable Monthly Dividend; 3 Special Periodic Dividends Totaling $0.18 Per Share)

7) OCSL: 8.06%; 7.28% (Stable Quarterly Dividend)

8) PFLT: 8.58%; 9.82% (Stable Monthly Dividend)

9) ARCC: 8.77%; 8.72% (3% Quarterly Dividend Increase; 3 Special Periodic Dividends Totaling $0.06 Per Share)

10) TSLX: 8.95%; 8.54% (Stable Quarterly Dividend; 4 Special Periodic Dividends Totaling $0.22 Per Share)

11) PSEC: 9.68%; 11.04% (Stable Monthly Dividend)

12) TCPC: 9.94%; 10.75% (Stable Quarterly Dividend)

13) FSK: 10.20%; 14.46% (Stable Quarterly Dividend; 1 Special Periodic Dividend Totaling $0.09 Per Share)

14) AINV: 10.97%; 11.01% (Stable Quarterly Dividend)

15) MCC: 13.23%; 5.64% (100% Quarterly Dividend Decrease)

When comparing each company’s TTM dividend yields, a general conclusion that can be drawn is that the lower a company’s percentage was as of 9/7/2018, the lower the probability of a dividend decrease (or the higher the probability of a stable/increasing dividend) during the calendar fourth quarter of 2018-third quarter of 2019 (and vice versa). Again, there are some exceptions to this general “trend” at periodic intervals (for instance companies who experience a “spike” in non-accruals) but I believe one can see some patterns arise when analyzing this specific metric.

For instance, since MAIN, OCSI, GBDC, NEWT, SLRC, GAIN, OCSL, PFLT, ARCC, TSLX, PSEC, and TCPC (ranks 1-12 in respective order) had a relatively low (below 10.00%) TTM dividend yield as of 9/7/2018, I do not believe it was a surprise each company either had a stable or increasing dividend per share rate during the calendar fourth quarter of 2018-third quarter of 2019 (in MAIN’s, GBDC’s, GAIN’s, ARCC’s, and TSLX’s case also declaring special periodic dividends). As one moves down this list, it is also not surprising MCC (rank 15) had a material (at or greater than 10%) decrease to the company’s dividend per share rate during this timeframe. MCC also continued to have the largest percentage of investments on non-accrual status as of 6/30/2019. This was a negative trend that factored into this company’s recent notable dividend reduction. In fact, MCC did not pay a dividend for the calendar second or third quarters of 2019; mainly due to another quarter of generating a net investment loss/negative net ICTI.

Annual Forward Yield Based on Stock Price as of 9/6/2019 (Based on Lowest to Highest Percentage) (Another Good General Indicator of Near-Term Dividend Sustainability; Exceptions Apply):

1) MCC: 0.00%*

2) MAIN: 5.83%

3) GAIN: 6.92%

4) GBDC: 6.93%

5) OCSL: 7.28%**

6) TSLX: 7.49%

7) OCSI: 7.58%**

8) SLRC: 8.00%

9) ARCC: 8.46%

10) PFLT: 9.82%

11) NEWT: 10.23%

12) TCPC: 10.75%

13) AINV: 11.01%***

14) PSEC: 11.04%

15) FSK: 12.93%

* = A notable portion of MCC’s dividend was classified as a “return of capital” (“ROC”) distribution for tax-tear 2018. Simply put, MCC distributed annual dividends in excess of the company’s annual net ICTI. This is the main reason for the ($0.05) per share decrease in dividend distributions for the calendar first quarter of 2019 and no dividend for the calendar second and third quarters of 2019.

** = During the calendar third quarter of 2018, it was disclosed OCSI and OCSL had a notable net ICTI/cumulative UTI prior period adjustment which lowered each company’s TI. As such, a notable (at or above 10%) portion of OCSI and OCSL’s dividend was classified as a ROC distribution for tax-year 2018.

*** = Over the past several years, a notable portion of AINV’s dividend has been classified as a ROC distribution. Simply put, AINV has distributed annual dividends in excess of the company’s annual net ICTI. However, each year has had a growing percentage of distributions out of TI (versus a ROC distribution). For 2019, I am projecting this TI/ROC proportion will continue to be a larger percentage allocated to TI which would be a positive catalyst/trend.

Annual Forward Yield Based on NAV as of 6/30/2019 (Based on Lowest to Highest Percentage) (A Very Good General Indicator of Near-Term Dividend Sustainability; Exceptions Apply):

1) MCC: 0.00%*

2) OCSL: 5.76%

3) OCSI 6.39%

4) GAIN: 6.64%

5) SLRC: 7.46%

6) PSEC: 7.99%

7) GBDC: 8.03%

8) PFLT: 8.72%

9) ARCC: 9.26%

10) TSLX: 9.35%

11) AINV: 9.47%

12) FSK: 9.64%

13) MAIN: 10.43%

14) TCPC 10.56%

15) NEWT 15.13% (different business model; see “****” note below)

Regarding this specific metric, I would point out this type of comparative analysis a couple years ago correctly identified PSEC with heightened risk of a near-term dividend reduction. It was determined PSEC had the second highest annual forward yield of 10.60% based on each company’s NAV as of 6/30/2017. It also identified, at the time, several other BDC peers during each respective time period. Simply put, I believe this specific metric has proven to be highly useful.

Weighted Average Annualized Yield on Debt Investments as of 6/30/2019 (Based on Highest to Lowest Percentage) (Another Very Good General Indicator of Near-Term Dividend Sustainability; However Also Generally Heightens Risk for Investment Depreciation):

1) GAIN: 13.10% (0.1% Net Increase When Compared to 6/30/2018)

1) PSEC: 13.10% (0.1% Net Increase When Compared to 6/30/2018)

3) TCPC: 11.00% (0.6% Net Decrease When Compared to 6/30/2018)

4) TSLX: 11.20% (0.2% Net Decrease When Compared to 6/30/2018)

5) SLRC: 10.77% (0.13% Net Decrease When Compared to 6/30/2018)

6) MAIN: 10.67% (0.19% Net Increase When Compared to 6/30/2018)

7) FSK: 10.50% (0.6% Net Decrease When Compared to 6/30/2018)

8) ARCC: 10.40% (Unchanged When Compared to 6/30/2018)

9) AINV: 9.80% (0.9% Net Decrease When Compared to 6/30/2018)

10) MCC: 9.50% (0.5% Net Decrease When Compared to 6/30/2018)

11) PFLT: 8.90% (0.2% Net Increase When Compared to 6/30/2018)

12) OCSL: 8.70% (0.1% Net Decrease When Compared to 6/30/2018)

13) GBDC: 8.60% (0.1% Net Increase When Compared to 6/30/2018)

14) NEWT: 8.31%**** (0.63% Net Increase When Compared to 6/30/2018)

15) OCSI: 7.80% (0.1% Net Decrease When Compared to 6/30/2018)

**** = In regards to NEWT’s low percentage, it should be noted a sizable percentage of the company’s net ICTI (a more technical term for TI) comes from capital gains associated with the sale of its small business administration (“SBA”) Section 7a government-guaranteed loans (in the future a likely increasing proportion within SBA 504 loans and its recently created joint venture with TCPC). Premiums associated with the Section 7a loans have ranged between 9%-13% over the past 5+ years. Simply put, these premiums have remained fairly consistent, even during times when other pockets of debt/credit markets have experienced heightened volatility when it comes to pricing/yields. In addition, NEWT continually recognizes recurring dividend income from some of the company’s control investments. As such, NEWT’s low weighted average annualized yield on debt investments is a bit deceiving when it comes to dividend sustainability/yields. In a nutshell, NEWT has a more unique business model when compared to the fourteen BDC peers within this analysis.

Cumulative UTI Outstanding Shares of Common Stock Ratio as of 6/30/2019 (Based on Highest to Lowest Ratio) (Great Indicator of Dividend Sustainability and Potential for Future Special Periodic Dividends):

1) TSLX: 1.19 (0.96 as of 6/30/2018)

2) ARCC: 1.06 (0.80 as of 6/30/2018)

3) GAIN: 0.88***** (0.49 as of 6/30/2018)

4) MAIN: 0.43 (0.49 as of 6/30/2018)

5) SLRC: 0.37 (0.26 as of 6/30/2018)

6) FSK: 0.33 (0.63 as of 6/30/2018)

6) PFLT: 0.33 (0.04 as of 6/30/2018)

8) NEWT: 0.25 (0.10 as of 6/30/2018)

9) TCPC: 0.11 (0.12 as of 6/30/2018)

10) PSEC: 0.08****** (0.06 as of 6/30/2018)

11) AINV: 0.06 (0.00 as of 6/30/2018)

12) OCSL: 0.04 (0.12 as of 6/30/2018)

13) GBDC: 0.03 (0.26 as of 6/30/2018)

13) OCSI: 0.03 (0.14 as of 6/30/2018)

15) MCC: 0.00; No cumulative UTI (0.10 as of 6/30/2018)

***** = Notable capital gain on Cambridge Sound Management, Inc. and Logo Sportswear, Inc. during the calendar fourth quarter of 2018; partially offset by ($1.52) per common share deemed distribution during the calendar first quarter of 2019

****** = Based on an Internal Revenue Code (“IRC”) tax year-end of August 31st (tax year 2019 began 9/1/2018)

As readers can see, some BDC peers like to be cautious when it comes to distributing out its cumulative UTI (for instance TSLX and ARCC) while some companies like to distribute most of its “built-up” cumulative UTI annually; whether it is through a special periodic typically twice a year (for instance GAIN [however recently declared an extremely large “deemed” distribution; notably lowered this metric]), at the end of the year (for instance GBDC in recent years), or through an increased dividend in the second half of the year (for instance NEWT).

Conclusions Drawn (PART 2):

This article has compared ARCC and fourteen BDC peers in regards to recent dividend per share rates, yield percentages, and several other highly unique dividend sustainability metrics. This article also discussed ARCC’s near-term dividend sustainability. Using Table 3 above as support, the following were the recent dividend per share rates and yield percentages for ARCC:

ARCC: dividend of $0.40 per share and special periodic dividend of $0.02 per share for the calendar third quarter of 2019; 8.72% TTM dividend yield (when including special periodic dividends); 8.46% annual forward yield to the company’s stock price as of 9/6/2019; and 9.26% annual forward yield to the company’s NAV as of 6/30/2019

Since ARCC had an unchanged TTM weighted average annualized yield on the company’s debt investments (positive factor versus most BDC peers I currently cover), a very attractive cumulative UTI balance (very positive factor), a slightly below average interest rate on all debt outstanding (positive factor), and an above average percentage of floating interest rate debt investments (generally a positive factor when/if LIBOR rises; could become a negative factor if LIBOR continues to decrease over the foreseeable future), I believe the company should have an annual forward yield to its NAV slightly-modestly above the average of the fifteen BDC peers within this analysis. From analyzing these metrics, while also acknowledging ARCC’s continued increase in stock price, I now believe ARCC is currently appropriately valued.

When combining this data with various other analytical metrics not discussed within this specific article (some factors were covered in PART 1), as outlined in my dividend sustainability analysis in July, I believe the likelihood of ARCC having a stable-slightly increasing quarterly dividend through at least the second quarter of 2020 remains very high (90% probability).

When combining the analysis above with various other analytical metrics not discussed within this specific article (some factors were covered in PART 1), the following probabilities regarding the fourteen BDC peer’s near-term dividend sustainability is provided:

TSLX: Very high (90%) probability of a stable “base” dividend and minor-modest special periodic dividend for the calendar fourth quarter of 2019

GAIN: Very high (90%) probability of a stable-slightly increasing monthly dividend for October-December 2019 and a $0.06-$0.12 special periodic dividend range for the calendar fourth quarter of 2019^

GAIN’s dividend sustainability was recently discussed, in detail, in the following article:

Gladstone Investment's Updated Dividend Sustainability Analysis (Impacts From Very Large Deemed Distribution)

MAIN: Very high (90%) probability of a stable-slightly increasing monthly dividend for December 2019-February 2020 and a slightly decreased special periodic dividend for the second half of 2019 when compared to the first half of 2019^^

MAIN’s dividend sustainability was recently discussed, in detail, in the following article:

Main Street Capital's Dividend Sustainability Through June 2020 (Includes Special Periodic Dividend Projection)

NEWT: Very high (90%) probability of a modestly-notably increasing dividend for the calendar fourth quarter of 2019

SLRC: Very high (90%) probability of a stable-slightly increasing dividend for the calendar fourth quarter of 2019

PFLT: High (80%) probability of a stable-slightly increasing dividend for October-December 2019^

OCSI, OCSL, and TCPC: High (80%) probability of a stable-slightly increasing dividend for the calendar fourth quarter of 2019

FSK, GBDC, and AINV: High (80%) probability of a stable dividend for the calendar fourth quarter of 2019

PSEC: High (80%) probability of a stable dividend for the months of November 2019-January 2020^^^

MCC: Due to the potential acquisition of this BDC and Medley Management Inc. (MDLY) by Sierra Income Corp. (pending ticker SRA), it has been deemed unwarranted to project future dividend per share rates until this proposed merger is approved/disapproved

^ = Monthly dividends have currently been declared through September 2019 (per GAAP)

^^ = Monthly dividends have currently been declared through November 2019 (per GAAP)

^^^ = Monthly dividends have currently been declared through October 2019 (per GAAP)

Looking back to prior dividend projections, I correctly projected MCC’s cumulative UTI balance would decrease to $0 during the calendar second half of 2018 and would remain at $0 during 2019. This analysis also correctly identified a high probability of a special periodic dividend for ARCC, GAIN, MAIN, and TSLX during 2019 (and in GAIN’s case an increased special periodic dividend).

My BUY, SELL, or HOLD Recommendation:

From the analysis provided above, including additional factors not discussed within this article, I currently rate ARCC as a SELL when the company’s stock price is trading at or greater than a 16.0% premium to the mean of my ARCC projected NAV as of 9/30/2019 range ($17.20 per share), a HOLD when trading at greater than a 6.0% but less than a 16.0% premium to the mean of my ARCC projected NAV as of 9/30/2019 range, and a BUY when trading at or less than a 6.0% premium to the mean of my ARCC projected NAV as of 9/30/2019 range. These ranges are unchanged when compared to my last ARCC article (approximately 3 weeks ago).

Therefore, I currently rate ARCC as a HOLD. As such, I currently believe ARCC is appropriately valued. My current price target for ARCC is approximately $19.95 per share. This is currently the price where my recommendation would change to a SELL. This price target is unchanged when compared to my last ARCC article. The current price where my recommendation would change to a BUY is approximately $18.25 per share. This price is also unchanged when compared to my last ARCC article.

As of 9/6/2019, I currently have the following recommendation for the fourteen BDC peers within this analysis (based on premium (discount) to CURRENT NAV; considers full list of positive/negative factors/trends):

BUY: 1) SLRC; and 2) PFLT

HOLD: 1) AINV; 2) OCSL; 3) FSK; 4) GAIN; 5) PSEC; 6) MCC; 7) TCPC; 8) TSLX; 9) OCSI; and 10) NEWT

SELL: 1) MAIN; and 2) GBDC

While I do find MAIN attractive from an operations/portfolio perspective, I also believe, when compared to some of the other BDC peers, this stock is currently slightly overvalued. For long-term holders of MAIN, this indicates I personally would not currently add to my existing position at current prices (if I held a position; which I do not).

Final Note: Each investor's BUY, SELL, or HOLD decision is based on one's risk tolerance, time horizon, and dividend income goals. My personal recommendation will not fit each reader’s current investing strategy. The factual information provided within this article is intended to help assist readers when it comes to investing strategies/decisions.

Recent/Current BDC Sector Stock Disclosures:

On 10/12/2018, I initiated a position in ARCC at a weighted average purchase price of $16.40 per share. On 12/10/2018, 12/18/2018, and 12/21/2018, I increased my position in ARCC at a weighted average purchase price of $16.195, $15.305, and $14.924 per share, respectively. When combined, my ARCC position has a weighted average purchase price of $15.293 per share. This weighted average per share price excludes all dividends received/reinvested. Each ARCC trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha.

On 2/2/2018, I re-entered a position in MAIN at a weighted average purchase price of $37.425 per share. On 2/5/2018, 3/1/2018, 10/4/2018, 10/23/2018, 12/18/2018, and 12/21/2018, I increased my position in MAIN at a weighted average purchase price of $35.345, $35.365, $37.645, $36.674, $35.305, and $33.045 per share, respectively. When combined, my MAIN position had a weighted average purchase price of $34.713 per share. This weighted average per share price excluded all dividends received/reinvested. On 7/12/2019, 7/15/2019, and 7/16/2019, I sold 33%, 26%, and 41% of my position in MAIN at a weighted average sales price of $42.23, $42.605, and $42.681 per share as my current price target, at the time, of $42.20 per share was met. When calculated, this combined sale had a weighted average total return of 31% in a little over a year. Each MAIN trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha.

On 9/6/2017, I re-entered a position in PSEC at a weighted average purchase price of $6.765 per share. On 10/16/2017 and 11/6/2017, I increased my position in PSEC at a weighted average purchase price of $6.285 and $5.66 per share, respectively. When combined, my PSEC position has a weighted average purchase price of $6.077 per share. This weighted average per share price excludes all dividends received/reinvested. Each PSEC trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha.

On 6/5/2018, I initiated a position in TSLX at a weighted average purchase price of $18.502 per share. On 6/14/2018, I increased my position in TSLX at a weighted average purchase price of $17.855 per share. My second purchase was approximately double the monetary amount of my initial purchase. When combined, my TSLX position has a weighted average purchase price of $18.071 per share. This weighted average per share price excludes all dividends received/reinvested. Each TSLX trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha.

On 10/12/2018, I initiated a position in SLRC at a weighted average purchase price of $20.655 per share. On 12/18/2018, I increased my position in SLRC at a weighted average purchase price of $19.66 per share, respectively. When combined, my SLRC position has a weighted average purchase price of $19.909 per share. This weighted average per share price excludes all dividends received/reinvested. Each SLRC trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha.

On 3/13/2019, I initiated a position in GAIN at a weighted average purchase price of $11.625 per share. On 6/6/2019, I increased my position in GAIN at a weighted average purchase price of $11.085 per share. When combined, my GAIN position has a weighted average purchase price of $11.257 per share. This weighted average per share price excludes all dividends received/reinvested. Each GAIN trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha.

All trades/investments I have performed over the past several years have been disclosed to readers in real time (that day at the latest) via the StockTalks feature of Seeking Alpha (which cannot be changed/altered). Through this resource, readers can look up all my prior disclosures (buys/sells) regarding all companies I cover here at Seeking Alpha (see my profile page for a list of all stocks covered). Through StockTalk disclosures, at the end of August 2019 I had an unrealized/realized gain “success rate” of 81.8% and a total return (includes dividends received) success rate of 93.2% out of 44 total positions (updated monthly; multiple purchases/sales in one stock count as one overall position until fully closed out [no realized total losses]). Both percentages experienced a minor-modest decrease in August due to the sell-off within the mortgage real estate investment trust (mREIT) sector; mainly due to narrowing net spreads and higher prepayments. I encourage other Seeking Alpha contributors to provide real time buy and sell updates for their readers which would ultimately lead to greater transparency/credibility.

Disclosure: I am/we are long ARCC, GAIN, GAINM, PSEC, SLRC, TSLX. 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.

Additional disclosure: I currently have no position in AINV, BDCL, BDCS, BIZD, BLK, FSK, GBDC, MAIN, MCC, MDLY, NEWT, OAK, OCSI, OCSL, PFLT, or TCPC.