While doing some recent BDC research it became apparent that TCPC may be a sleeper among the better BDC's. Out of 41 BDC's, I currently keep a close eye on 6 of the proven best and noticed that TCPC was the only one trading near the bottom of the Bollinger Bands. Of all the BDC's, TCPC and SLRC** look appealing now.
** SLRC is attractive because of the buyout of Crystal Financial. I posted on the investorhub web page about that acquisition.
TCPC has been in a gradual price decline for three months, dropping from $15.96 on September 28th to the Friday close of $14.66. The reason, as I see it is threefold. First, the Company has waived incentive fees for 2012 but will begin incentive fee payments in 2013 thus impacting the NII starting in Q1 of 2013. Second, TCPC has filed a preliminary document for a four million share follow-on stock offering raising the "dilution" flag for some investors. Both these items suggest some negative consequences to the NII per share, but the stock price slide, in my judgment, has been overextended. A third cause for the price slide of the last few days may be year-end tax loss selling. If tax selling is a factor, it will end on Monday.
One analyst has projected Q4 NII of $.47 per share (with no incentive fees) but also said if normal incentive fees were paid, that NII would be $.37. In Q3, NII would have been $.34, with incentive fees, versus the already reported $.43 with no incentive fees. The 2013 quarterly NII estimates, which include the normal incentive fees, are $.39, $.39, $.38, and $.40, for a total NII for 2013 of $1.57. And that $1.57 is with a four million share follow-on offering already priced into the equation in early 2013 by this analyst. The average 2013 estimated NII by all analysts is $1.56 so the analysts' appear to all closely agree. If dividends are paid out at the $1.57 rate in 2013 or shortly thereafter, the dividend yield will be 10.71% based on the current price of $14.66. (Current yield is 9.55% not counting the recent $.05 extra). The median dividend yield for all BDC's is currently (as of Friday) is 9.2% and for the TCPC peer group is 9.4%. If TCPC, in 2013, paid out just $1.50 in dividends rather than the full NII of $1.57, the dividend yield would still be 10.23%.
Of my six favored stocks, TCPC is the only one that has all analysts declaring a "Buy" rating (no "Hold's or Sell's). Additionally, the insiders are buying the stock. There have been insider buys on November 28th (10000 shares); December 7th (10000 shares); December 11th (7298 shares); December 12th (2702 shares); and December 17th (2300 shares). Management is closely aligned with the shareholders not only because they put a lot of money into stock ownership, but they have locked up their stock positions for three years from the IPO and the Company has one of the lowest fee structures (base fees and incentive fees) in the industry.
Despite the N-2 filing for the four million share offering (which is not yet approved by the SEC), TCPC may not be able to bring that offering to market because their stock price is below the last reported NAV, and, as far as I know, TCPC does not yet have permission to sell stock below NAV. Of course, we don't know what the current NAV actually is. TCPC is a relatively young BDC (IPO on 4-4-12) and has not yet asked for permission to sell below NAV. Even without an equity offering, TCPC last reported about $70 million in dry powder and given the current high rate of loan prepayments, that $70 million should take them through two or three quarters. Also they have not yet applied for SBA financing which could garner lots of low cost capital going forward, like $150 million with the first SBIC license.
Price to book is an important metric to monitor because NAV is one of the less volatile metrics. Currently, the TCPC price to book is .991, which is the lowest of the six quality stocks I closely monitor. As of Friday, ARCC price to book was 1.093; SLRC was 1.041; PNNT was 1.051; TCRD was 1.091; and MCC was 1.134. That makes TCPC, at .991, a bargain. The TCPC price to book is about the same as the median of both its BDC peer group and the BDC industry. But TCPC is a better BDC than most other BDC's and three months ago was trading at 1.086 price to book. At 1.086x book, TCPC would be at $16.06 per share.
If we want to calculate the total one year return potential by adding the current dividend yield (9.55%) to the percent price gain to the analysts' consensus target price (16.37% on a consensus target price of $17.06), that total return is 25.92%. That is not only generous, but is also better than any of the other five BDC's I have mentioned. But analysts can get over exuberant at times, so for those of you not comfortable with a $17.06 target price, let's do the same thing (total return) but use the recent high price instead of the consensus target price. In that case, the total TCPC return calculates to 18.42% and that is just getting the stock back to its recent high. Again, that 18.42% total return is the best of the six BDC's when considering the recent high price of each.
TCPC has gotten off to a great start with its shareholder friendly fee structure, low cost liabilities, dividend raises, and impressive portfolio growth. But its stock price appears to have been over penalized because its freeze on incentive fees is ending. At least I think so; the analysts, with their unanimous "buy" ratings may think so; and the TCPC insiders, with their stock purchases, may think so.
So for those looking for a high paying dividend stream with the potential for some add on capital gains, TCPC is worth a look.
As always, just one opinion with help from The Shadow.
Thanks for the analysis. It has been helpful. I like TCPC's shareholder friendly stances such as waiving its incentive fees for one year. Their current $.35/qtr ($1.40/yr) dividend is covered by their projected NII ($1.56) for 2013. I am somewhat concerned they may have trouble maintaining or increasing their current dividend if they have to start borrowing at a more typical market rate. From their 3rd qtr 10-Q, it appears they are borrowing $182 +/- Million at about 1.5% (Libor + .44% to .85%) . $48M is on a revolver that matures in July 2014 and $134M on a special Preferred Equity Fund that matures in July 2016. If they presently had to borrow at a more typical market rate, say 5.5%; their interest expense would increase by about $.34/sh ($7.28 M/21.5 M sh) and their dividend would not be covered. That said, I guess their interest rate is likely to stay lower than average for several years and there are numerous ways they could increase NII. I am contemplating taking a small position.
TCPC needs shareholder approval to issue new shares below NAV. they dont currently have that approval. that info is directly from an investor relations email. their reported NAV on 9/30/12 was $14.79
Thank you for your comment. There are so few responses to the considerable work it takes to put together a detailed post that I have to wonder if it is worth posting at all. So again, thanks for your words.
In my opinion, Stifel Nicolaus is the most thorough and best of the BDC analysts. Earlier this week, Stifel listed its six best BDC ideas for 2013. TCPC was one of those six and had the second highest potential "total return" of the six. With forty one BDC's out there, that puts TCPC in elite company.