As you point out, SCM (Stellus Capital) is one of the smaller BDC's. It has about a $120 million market cap. which places it 41st out of 52 publically traded BDC's based on market capitalization. With just $337 million in assets and a low share count (about 12.5 million shares), a BDC this small has less flexibility than the bigger boys during difficult economic times.
Also SCM is not covering its dividend with NII, so it waives certain fees to help the situation, but does the waiver only in the fourth calendar quarter which makes calendar Q4 look great from an earnings standpoint, while Q1, Q2, and Q3 then return to NII well below the quarterly dividend of $.34 per share. KBW does cover SCM and the KBW NII projections suggest SCM will not cover its dividend in any quarter, without fee waivers, all the way through 2017. KBW has SCM rated as Market Perform with a $12.50 target price. The analysts community as a whole has SCM rated with two Buys and four Holds which is not an overwhelming vote of confidence. However, SCM is relatively attractive versus its peers (market cap of less than $200 million) when looking at price to book, dividend yield, and PE ratio on 2016 earnings. So it may work out just fine.
I do nothing with REIT's so I have no opinion on UDF.
To answer your question, TCPC, per its last financial report, had two companies on non-accrual which amounted to .89% of portfolio cost and just .19% on a fair value basis(the fair value of the investments/portfolio fair value). Those are good numbers.
KBW does have five other portfolio companies on their watch list but even if all five went on non-accrual (not a likely event) it would cost TCPC just $.07 per share annually which would still see TCPC covering its annual dividend with NII.
The strength in the TCPC stock price today may have been partly due to National Securities reiterating its "Buy" rating and its target price of $17. National Securities also increased its Q4 NII estimate to $.42 from $.40, and increased its year 2016 estimate to $1.61 from $1.59, and commented on TCPC's excellent asset quality.
I don't know a lot about National Securities but I try to follow all brokerage firm research on the BDC industry. These brokerage research guys get paid big bucks and even though they often carry some biases, they can still move stock prices with their recommendations. The three BDC research guys at KBW are the best and most comprehensive (special industry reports etc.) when it comes to BDC evaluation, in my opinion. One way to play the BDC investment game is to focus on those BDC's which carry a "Buy" rating from KBW. Of course, that won't always guarantee investment success, but it will keep investors away from the poorly managed BDC's. By the way, KBW was bought by Stifel Nicolaus.
I agree with you that it is a good idea to stay with the higher-tier lenders. I love the high dividend yields of BDC's, but I also like to couple those dividends with capital gains from price movement, which is why I always look at total return when assessing a BDC. And with the current depressed stock prices, there are some very attractive total return projections among the quality BDC's, with TCPC being just one of them.
A good day to you.
TCPC just announced it will release Q4 earnings on Monday, February 29th, pre-market. CC will be on the same day at 1.00 p.m. Eastern.
I do monitor SUNS somewhat along with all other BDC's (52 of them) but I don't do a lot of detailed work with it. As you know, SUNS is the Floating Rate Senior Secured BDC, run by the guys at Solar Capital, SLRC. At the current depressed price it looks good from the standpoint of price to book and dividend yield. Analysts don't love it though (4 out of 6 have a "hold" rating), and my favorite analysts at KBW don't cover it at all. SUNS is just barely covering the dividend with NII and NII growth is projected to be flatish.
Regarding the National Securities suggestion of a dividend increase, here is a portion of that report:
" We anticipate the portfolio will have robust growth through the remainder of 2015 and into 2016, with the stock likely to trade at or above NAV in 2016 permitting accretive equity issuance of $150 million. NIM (net investment margin) fell from 10.77% in 2013 to 10.01% in 2014 although we expect NIM will finish 2015 at 10.22% and 2016 at 10.28%. We expect that the regular dividend will be increased in 1Q16 to $0.38/share from $0.36/share as the regular run rate of NII/share should rise with higher debt investment balances and modestly higher effective yields."
Thanks for your comments.
KBW, on January 21, came out with a report on BDC's which forecasted a December quarter 3-5% decline in book value for BDC's generally; and a higher 5-8% decline for those BDC's with high oil exposure (AINV, CMFN, PNNT, CPTA, FSIC, BKCC, and NMFC) or large CLO equity positions (TICC, KCAP, PSEC, AINV).
I mention this because TCPC pre-reported Q4 numbers and its' projected decline in book is about 2.2%, which is below (better then) the general forecast.
More importantly, TCPC is projecting Q4 NII of $.41 to $.43 per share which exceeds both last year's Q4 NII and this year's Q3 NII. Not only that, but the $.41 to $.43 is well above the regular quarterly dividend of $.36. KBW is projecting that all four quarters in 2016 will come it at numbers well above the $.36 quarterly dividend, or $1.55 for the full year, and $1.65 for 2017, versus the current annual dividend of $1.44. These numbers may be why National Securities, in a January 20 research report, not only initiated coverage with a "Buy" rating and a $17 target price, but also projected an increase in the quarterly dividend to $.38 in Q1 of 2016. Following TCPC's Q4 forecast, Cantor Fitzgerald also reiterated its' "Buy" recommendation.
At today's price close at $13.19, the price to book at the TCPC projected lower book of about $14.75 is still a very alluring .894. This BDC, more often than not, commands a price above NAV. The current dividend yield is 10.92%, and the total return (% dividend yield plus % capital gain to the KBW target price of $17) is a compelling 39.81%. All this from a BDC with a portfolio of 97% senior secured loans, with 78% of the loan portfolio consisting of floating rate loans. Non-accruing loans are less than one percent of the portfolio, and portfolio exposure to energy is about 2.8% versus the industry average of about 5%.
Insiders are buying the stock. Within the last three trading days, five insiders have bought the stock in the open market at prices ranging from $12.77 to $13.15.
This morning CPTA did declare the regular $.1567 monthly dividend for the first three
months of 2016. In addition they said they would waive quarterly incentive fees as necessary to assure quarterly NII would support the dividend distribution. Very nice touch by management.
TCAP trades at a premium to NAV because it is a internally managed BDC (low cost operation with high ROE). And an 11+% dividend yield for such an attractive franchise is nothing less than outstanding.
By the way, in my earlier post on TCAP I forgot to add that KBW re-issued their "Buy" rating. Their target price is $23. Gain to target from the current price of $19.22 is 19.67%. Couple that with the high dividend yield and one can see why KBW chose to recommend this proven BDC once again.
You are welcome and I too hope foreign investors will recognize just how much BDC's are undervalued and the outstanding dividend yields they provide.
Yesterday, KBW issued a report on TCAP with the title "Holiday Opportunities: Earnings Growth Ahead".
In summary, the report basically says that TCAP has been one of the best performing BDC's over the past five years based on ROE generation, credit quality, dividend growth, and stock price performance. The Company has plenty of capital for growth given its current cash position, funds available under its credit facility, and the $75 million now available under the new SBIC leverage rules. NII estimates for the next five quarters are $.56, $.58, $.58, $.56, and $.57, all of which cover the current regular quarterly dividend of $.54. (2016 earnings will be 106% of the dividend). KBW goes on to say that TCAP trades at a discount to its peers, despite being one of the best historical performers.
The omnibus spending bill extends permanently a provision that exempts foreign investors of U.S. Regulated Investment Company (RIC) distributions (dividends) from a withholding tax. (Up to a 30% tax). Up to now, that provision was always temporary and had to be continually extended since 2004, when the allowance was initially permitted by the U.S. congress. That discouraged foreigners from investing in U.S RIC companies because foreign investors knew the temporary provision could lapse out of existence, if not renewed, thus re-establishing the withholding tax. Now that the provision is permanent, foreign investors may be more willing to invest in American RIC companies. BDC's are RIC companies and BDC's pay some very alluring dividends.
It is hard to tell to what extent or how soon this might help BDC stock prices. But one would like to think that maybe some of the buyers that were lost when the BDC's were excluded from the Russell and S&P indexes in February and March of 2014 will now be replaced by foreign individuals and foreign institutions.
The President signed the spending bill on December19th.
P.S. Put some words about MCC over on the MCC board.
Medley Capital (MCC) is a very interesting story because it has been totally out of favor for a long time. It had been issuing far too much stock too fast, thus rapidly growing the size of the Company (and management fees) at the expense of the stock price. But after the September Q, MCC improved the management fee structure and increased the share repurchase program. MCC also reported NII of $.31 per share, one cent above the quarterly dividend amount.
On December 6th, KBW, who had been critical of MCC because of its rapid growth, issued an "Outperform" rating ("Buy") based on valuation. KBW still has concerns about MCC portfolio credit issues, but believes the current discount is at a level where the potential upside is significantly greater than further downside. The KBW forward quarterly estimates for the next two years equal or exceed the quarterly dividend of $.30 and the target price is $9.00. Also, KBW believes RiverNorth, which has been a publically active stockholder with FCS, and is the largest stockholder of MCC, could take a public active position given the low price to book of MCC.
With MCC stock now around at $7.57, the price to book is .688 and the dividend yield is 15.85%. Total return to the KBW target price is 34.74%. The brokerage analysts as a group are also warming up to MCC. A couple of weeks ago those analysts had seven "Buy" recommendations and four "Hold". Now they are nine "Buy" and two "Hold". The average target price for all analysts is $9.70. The one other analyst report I have access to is that of Credit Suisse. Per their December 4th report, they have a "Buy" rating and a $11 target price. They also estimate that NII for 2016 will cover the dividend payout for 2016.
MCC has $150 million of SBIC debt (the maximum allowed with one license), but could add $200 million more if it eventually is able to move to three licenses under the new SBIC leverage law. That inexpensive money puts MCC in a comfortable position looking forward.
It looks like CPTA has about $2.1 million left on its stock buyback program as of the end of the September quarter, per the 10Q.
"During the nine months ended September 30, 2015, and since the approval of the repurchase program, the Company repurchased 624,050 shares of common stock in open market transactions for an aggregate cost (including transaction costs) of $9.9 million. As of September 30, 2015, none of these share repurchases were unsettled. The Company is incorporated in Maryland and under the law of the state, shares repurchased are considered retired (repurchased shares become authorized but unissued shares) rather than treasury stock. As a result, the cost of the stock repurchased is recorded as a reduction to capital in excess of par value on the consolidated statement of changes in net assets."
In Q2 and Q3 CPTA bought back about half the stock authorized so as of the end of Q3 still had about $6 million available to buy back more stock.
As you and jman point out, a concern with CPTA is that 11% of its portfolio is in energy companies, so credit problems in the portfolio could slow NII growth. But with current available funds, plus funds obtainable by selling off more equity positions, plus new low cost SBA funds that will now be available (thanks to the new SBIC leverage law signed December 19th as part of the spending bill), CPTA earnings could grow nicely despite the additions of some non-accruals in the portfolio. Given the recent signing of the spending bill, the current NII analysts estimates do not include the use of new SBA money.
CPTA has gone from $19 in April to under $12 now which creates a tax loss harvesting condition for a lot of investors, thus putting pressure on the stock. But that will end in a couple of days. We don't know if the CPTA stock price will rebound come January 2016, but we do know that with a dividend yield of 15.84% (at a price of $11.87); a total potential return of 59.06% (using the KBW target price of $17.00); a price to book of .658; the insiders buying the stock; CPTA continuing with its stock repurchase program; ten out of thirteen analysts rating the stock a "buy"; and with cheap SBA money becoming available; the reward/ risk ratio seems to be significantly favorable.
Joe Alala, the CEO at CPTA, on 12/23/2015, bought 84,950 shares at $11.60 per share for Capitala Private Investments LLC. That amounts to almost a million bucks. Information from the SEC site.
CPTA has been under price pressure probably due to portfolio credit quality concerns and yearend tax selling. It hit a 2015 year high price of $19 but is now around $12.03. At $12.03, the dividend yield, without including the $.05 monthly extra, is 15.63% ($.47 x 4 / $12.03), and the total return using the KBW target price of $17 is a stunning 56.94%. Price to book is .667, one of the lowest in the industry. Yes, CPTA has about 11% of its portfolio in energy related companies but the current price may have already discounted future problems, if any, with these energy companies. KBW says that the portfolio companies now on non-accrual plus those on the KBW watch list total 6.9% of the portfolio on a cost basis. And if all watch list companies went on non-accrual (not likely), it would cost CPTA about $.09 per share per year. There has been insider buying on November 13th and December 10th. Of the 13 analysts, 10 have a "Buy" rating and 3 have a "Hold". Street average price target is $18.19, well above that of KBW.
CPTA had a good Q3, increasing its earnings, covering its regular $.47 quarterly dividend ($.1567 monthly) with its $.48 NII per share, and increasing its book value. But after Q3, KBW rated it a "Market Perform" stating that growth may slow after Q1 of 2016 since CPTA will reach a .75 "debt to equity" position at that point, and the slower growth will result in NII not being able to cover the $.47 regular quarterly dividend in the near term. KBW does believe, however, that the $.47 dividend can be justified in each quarter of 2016 with the combination of NII and net capital gain income. As of 9-30-15, the equity holdings cost was $53 million with a fair value of $93 million. But with new SBA money, earnings growth could accelerate. First, remember that SBA borrowings are not subject to the regulatory "debt to equity" limit of "1". CPTA now has about $183 million in SBA borrowings and will now be able to quickly borrow $117 million in new cheap money and another $50 million with a third SBIC license. Investment of these additional dollars can remove the impediment to growth and can increase earnings.