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Today, Cantor Fitzgerald reiterated its "Buy" rating on TCPC. Target price is $17.50.
"In a report released today, David Chiaverini from Cantor Fitzgerald maintained a Buy rating on TCP Capital (NASDAQ: TCPC), with a price target of $17.50. The company’s shares opened today at $14.48.
Chiaverini said, “Our BUY rating on TCP Capital is based on 1) its solid dividend coverage with a 2016 NOI-to-dividend coverage ratio of 115%, well ahead of the peer group at 103%, setting the stage for future dividend increases, in our view; 2) ramping up of its small business investment company (SBIC) license, which we estimate should generate an IRR 40% higher than TCP Capital’s core business development company (BDC) business; 3) its shareholder-friendly fee structure with a cumulative total return hurdle of 8% in place that applies to both the calculation of the income incentive fee as well as the calculation of the capital gains incentive fee; and 4) its asset sensitive balance sheet should benefit meaningfully with rising interest rates, with a 100 bp, 200 bp, and 300 bp increase in rates resulting in net interest income growth of 3%, 12%, and 20%,.”
It is a bit of a chaotic stock market out there right now but that makes for some opportunities. Yesterday's news release from TCPC makes that stock especially interesting. The Company issued preliminary estimates for Q2 (ending June). The NII estimate was between $.43 and $.45 per share which is impressive given that the street estimate is for $.39. Also the TCPC estimate far exceeds the quarterly dividend of $.36 setting up a possible dividend increase or an extra dividend. NAV per share was estimated at $15.09 to $15.11, well above the Q1 NAV of $15.03.
From the CPTA Q1 10Q:
"As of March 31, 2015, 76.7% of our income-bearing portfolio was bearing a fixed rate of interest."
In any event, the high current dividend is well covered and secure as CPTA works to generate NII to cover the regular monthly dividend.
The problem is the average investor, most likely, does not understand all of this and he/she will wait for all the CPTA ducks to get in line before buying the stock. But in so doing, those investors will most likely pay a higher price for the stock since, by then, certain risk factors will have been mitigated. For example, an investor could wait for the CPTA regular dividend to be covered by NII and feel safer, but more safety usually comes with a higher stock price. Also, those investors, by waiting, will have given up a large dividend income. Remember, the current $.2067 dividend is paid monthly. Some, however are buying now, collecting a lot of dividend money, and will eventually wind up with both dividend money and capital gains as the Company does its' thing and completes its' monetization program.
Of course, I could be wrong about the whole thing, or the overall stock market could collapse. But those are the risks we take in the hopes of generous compensation. And we always have the high dividend income flow to keep us warm.
As always, just one opinion. And I hope I got all the dates and numbers correct.
Here are some of the options CPTA has regarding the payment of these dividends.
1) They could pay all those gains (and whatever other gains come along this year) to the stockholders this year as extra dividends.
2) They could hold the gains, pay a 4% excise tax, and carry the gains into next year and pay stockholders then. That decision will be made by October 31st (the end of the Capital Gains measurement period) or sooner. They could, for example, continue the $.05 extra monthly dividend into next year, using these gains, if they chose to do so. These dividends (earned in 2015), would all have to be paid out by August 31,2016, the end of their tax year.
3) Some variation of 1) and 2).
Nice discussion on CPTA so decided to add some words.
Yesterday's drop in price probably reflected the fact that CPTA did not declare an extra dividend on top of the extra they are already paying. In the just completed June quarter they realized a capital gain from the sale of their holdings in Corporate Visions. That gain was $.43 per share and CPTA must pay the stockholders that $.43 if not offset by any capital losses. But they don't have to do it now and they chose not to. (By the way, I went through the CPTA entire portfolio and it looks like they don't have any capital losses that might reduce those gains). Additionally, in Q1 (ended in March) CPTA sold 179,348 shares of Boot Barn at 22.33 per share for a net realized gain of $3.3 million. That gain, coupled with the gain from KBP investments, was a contributor to the $.05 extra dividend they are now paying and will continue to pay each month through the rest of this year. But they still own 420,252 Boot Barn shares and they could sell them all now. And BOOT is trading at about $31.75 per share which could produce a net realized gain of 11.5 million or $.70 per share for CPTA. BOOT just bought out another company and the analysts are revising their BOOT target prices. The last three analyst target prices for BOOT were $35, $40, and $41 (all this week), so the profit to CPTA, and the dividends to the stockholders, could get even better. And CPTA has several other companies in their portfolio, which when sold, could add more capital gains. See the recent stockholder presentation for a list of potential Capital Gain candidates.
As pointed out by others, the CPTA stock price is having a very nice day so far today.
In the next post I will list some of the time frame options CPTA has to pay these dividends.
You seem to have confidence in technical analysis(TA) but I'm not sure any TA will really tell us where the CPTA stock price is going from here. Nevertheless, here are a couple of recent items that may throw some light on the subject. The second item deasl with TA.
1) On Friday, June 12th, CPTA director Larry Carroll bought another 5000 shares at an average price of $16.44. He now directly owns 60,000 shares. Two days earlier he bought 3950 shares at $17. Over that three day period he bought $149,350 worth of CPTA stock.
2) The Dividend Channel says CPTA is oversold saying: "Capitala Finance Corporation (NASDAQ:CPTA) presently has a stellar rank, in the top 10% of the coverage universe, which suggests it is among the top most "interesting" ideas that merit further research by investors".
Point 2: This June 2nd release was one more step in CPTA's effort to not only generate additional NCGI, but also to reduce the non-interest paying equity holdings while increasing the loan holdings which generate interest income. The goal is to cover dividend payouts with NII, a goal which we all subscribe to since NII is a more reliable income stream. But as CPTA moves to achieve that goal, stockholders have little to complain about as long as NII plus NCGI cover the dividend. And that is especially true when we understand that 90% or more of NCGI (like NII) must, by regulation, be paid out to shareholders.
This relatively new BDC is working to make both of the above problems go away. In the meantime, the monetization program is generating large dividend payouts for the stockholders while making the stock a compelling value for patient investors.
In summary, CPTA is doing its job. It is covering its dividends with NII and NCGI with such success that it could carry over NCGI earnings into 2016 (instead of increasing the dividend further this year) thus continuing exceptional dividend pay outs in 2016, and It is working to cover its regular dividend with NII alone. It is serving its stockholders well with its conversion of equity to debt and with the substantial dividend distributions, and there is more to come.
Point 1: Investors find it comfortable when NII (Net Investment Income) cover dividends, but there are other types of earnings that help cover dividends, such as Net Capital Gain Income (NCGI). NCGI carries the same tax status and is an important part of distributable income. In the last quarter (Q1), CPTA paid a dividend of $.52 per share but earned $1.09 ($.37 from NII and $.72 from NCGI). That is a dividend coverage of 2.90x. Not only did CPTA have a great Q1 relative to dividend coverage, they actually covered their dividend with earnings in six of the seven quarters of their existence. They pay one of the highest dividend rates in the BDC arena and are so efficient at covering that dividend with earnings that they, in March, declared the $.05 monthly extra to be paid every month through the end of 2015. And the current, deliberate effort to generate NCGI income continues in Q2 as we have just seen with the sale of its equity position of Corporate Visions, Inc. Assuming none of that Capital Gain is offset by Capital Losses, that sale produced NCGI of $.43 per share which means the $.52 quarterly dividend amount (paid monthly) will once again be more than covered by the combined NII and NCGI income. Additionally, CPTA is positioned to add another large capital gain when it chooses to do so. It is my understanding that the lock up period for the sale of Boot Barn ended in May. Should CPTA choose to sell their remaining Boot holdings, that could result (based on current prices) in another big piece of NCGI (could be in the range of $.50 per share). In fact, at the end of Q1, the total equity holdings in the CPTA portfolio were valued at almost $40 million above cost. Of course, CPTA doesn't control the monetization time frame of all these equity holdings, but it is still a good position to be in and the June 2nd news release showed the value of these equity holdings.
Also there has been recent insider buying by officers. On May 15th, the COO bought 2000 shares. On May 19th, the CEO bought 5800. On may 20th, the CEO bought another 5800, the CCO bought 1465, the COO bought another 1170, and a director bought 500. On May 22nd a director bought 1050. On May 27th the CFO bought 600 shares. On June 10th (today) a director bought 3950 shares at $17.00. Like the rest of us, they buy to make money.
As always, just one opinion, and a good day to all.
The brokerage firm analysts seem to like what they are seeing. Of the five analysts that have issued ratings information since the CC, all have a "Buy" rating. Barclays is "Over Weight", Oppenheimer is "Outperform", MLV & Co. is "Buy",Deutche Bank is a "Buy", and JMP Securities is "Outperform". The price targets are $20, $19, $20, $20 and $19.50 respectively. With the stock price at around $17.00, projected total return is one of the highest in the BDC industry. (Total return is the sum of the dividend yield and percent price gain to the average target price). With the stock at $17, that total return is 29.29% and that is without the $.05 extra dividend. With the $.05 extra, the total return is 32.88%. The current dividend yields at $17 without and with the $.05 extra are 11.06% and 14.59% respectively.
The news release on June 2nd from CPTA was significant because it did a couple of positive things. First, it
added more capital gain income to help cover the dividend payout. Second, it added $4.3 million to income producing loans while reducing the non-income producing equity holdings.
So why isn't CPTA stock performing better? In my opinion, there are two perceived problems.
First, NII is not yet covering the dividend payout. In Q1, CPTA had NII earnings of $.37 per share versus a regular quarterly dividend of $.47. The street average estimate for Q2 is $.41 but I think that is too high given the 3.5 million follow-on offering in Q2 which has to impact earnings until the new funds are put to work. I think the Barclay's NII estimate of $.32 for Q2 is closer to reality. But all that is changing as CPTA puts its' substantial amount of cash to work in interest paying loans. That cash came from the April stock offering plus the cash being received from the on-going conversion of equity holdings. See Point 1 below.
Second, the NAV has been dropping because not only is the Company paying out big dividends (money from assets to our pockets as required by RIC regulations) but also because write-ups of equity holdings must be reversed(written back down) when those equity profits are taken. And though this reversal reduces the NAV (required by GAAP), it does not cost the Company one cent. The pressure on NAV from reversals will cease when CPTA slows its' aggressive monetization effort thus reducing the reversals of unrealized gains. See Point 2 below.
Looking at the possibility of more realized capital gains and a possible additional extra dividend from CPTA in 2015:
Here is a question and answer from the CC: (From the SA board)
"Yes, good morning. To follow up the previous question on monetizations on page 13 of your Investor presentation, you list the current equity investments and the cost basis and fair value. Other than Boot Barn, which we've talked about, are any of those near in a position to monetize this year? Or do all of them require some kind of special event like an IPO or something in order to put the monetization category?"
Joseph B. Alala - Chairman, President & Chief Executive Officer
"These opportunities, and we're looking at the page you're referring to, I think the most important thing is last – the quarter prior to Q1 is our largest investment listed on this page didn't monetize. These companies – or we'll typically not see an IPO for the majority of these companies for an exit. They will typically be arranged third-party sales and we are aware when these companies through our involvement have entered negotiations or have hired an investment bank to pursue alternatives. And with that, we do think a lot of this portfolio we'll seek to monetize in this year because a lot of these companies have been in our portfolio for several years. And you can see, because we put the cost basis in the fair value, that these companies have – a lot of these companies have nice significant unrealized gains in there.
So the owners of these companies would seek to monetize that in this good environment. So, I do think several more of these will be candidates to monetize in 2015, and that's why we really are saving our Boot Barn decision to see what happens because we could really do some things that can optimally use these exists to really both recycle the equity into yield and pay maybe additional special dividend."
So far I have seen comments from two analysts since the Tuesday CC.
Oppenheimer has reiterated its "Outperform" rating with a target price of $19 and issued strong earnings projections.
Barclays has reiterated its "Overweight" rating with a target price of $20.
The average of those two target prices is $19.50 which if realized would equate to a 12.07% capital gain from the current stock price of $17.40. Add that to the current dividend yield of 14.25%** and we get an inspiring total return of 26.32%. Without the $.05 extra, total return is still a hefty 22.87%. Also, the stock is selling at a discount to NAV.
**Monthly dividend consists of the current $.1567 plus the $.05 extra. The extra will be paid through each remaining month of 2015. The annualized dividend amount is $2.48.
It appears CPTA has set the groundwork toward making 2015 a most rewarding year for its stockholders.
With the huge capital gain realization ($.72 per share), CPTA had a impressive first quarter. NII was $.37; realized gain was $.72; and unrealized loss was $.33. But that $.33 was due to a reversal of a previous realized gain. Portfolio actually improved by $3.3 million (about $.25 per share) as opposed to the GAAP reported unrealized loss of $.33. So Q1 was very nice. CC also went well.
The current quarter (Q2) is also in the bag because CPTA should not only improve NII by putting to work the extensive capital they have (follow - on offering raised about $64 million), but will also be able to sell the rest of the Boot Barn stock they own for another significant capital gain.
CPTA continues to pursue its goal of monetizing its equity portfolio, reinvesting the cost basis of those equity positions into interest producing loans, and paying its stockholders the net capital gains from those equity investments in the form of dividends. The ultimate objective is to increase the NII to cover the dividend. Strong loan originations contribute to that objective and loan originations were strong in Q1. As the CEO put it:
"I think we just came off one of the best origination quarters we've had since being public. I would say our pipeline right now is consistent with that type activity. I think what is happening, and this is specific to Capitala, is all the multiple offices that we opened over the past 12 to 18 months are really starting to hit their stride. We're finding a lot of opportunities. And I think at least this quarter and our forecast for the balance of the year is we will continue to have strong originations, and I think we're going to get this high-quality risk-adjusted pricing that we're able to pull through our system".