BDCs for Growth and Income

12/04/2014 9:00 am EST

Focus: STOCKS

Briton Ryle

Editor, The Wealth Advisory

There are 65,000 companies in the US that have revenue between $20 million and $250 million; over 90% of these are privately held, which means they can’t sell stock to raise money, explains Briton Ryle, editor of The Wealth Advisory.

It is these companies that depend on Business Development Companies, known as BDCs, for financing.

Triangle Capital (TCAP) is among the most efficient of the BDCs. It has lower administrative costs and better returns than just about any of its competitors.

As a testament to its success, since it went public in 2007, Triangle has grown its investment portfolio of assets under management from $136 million to about $814 million at the end of 2013.

The quarterly dividend has grown from $0.15 a share to $0.59. In addition, the company returned another $0.15 a share in special capital gains distributions. The company said it would likely continue to return $0.20 a year in capital gains distributions for the next two or three years.

Triangle has been aggressively redeploying capital in 2014. Of its current portfolio value ($841 million), 48% was originated in the last 12 months.

The shares sold off hard after Q3 earnings when non-performing investments caused a $29 million write-down. But the company was very quick to write down the assets, which is the right thing to do.

Given the burst in investment activity, we expect the third quarter problems to be put behind it over the next two quarters. Current prices around $23 are very attractive. The yield is currently 9.2%.

Our other BDC stock, Prospect Capital (PSEC), is the biggest BDC out there. Prospect owns collateralized loan obligations (CLO).

A CLO is basically securitized debt. Prospect owns the debt on companies and gets payments from the debt.

Prospect also owns REITs that manage apartment buildings and storage facilities. In its last earnings conference call, Prospect said it was considering spinning these assets off into different entities, as current growth is somewhat limited by holding them.

In our opinion, this would be a good move. Prospect trades at a discount to net asset value (NAV) and spinning these businesses out could change that.

The current yield is nearly 13% and it’s paid monthly. Prospect is rated a strong buy under $11.

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