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Hercules: Strength in Tech Financing

03/17/2017 2:50 am EST


Tim Plaehn

Investment Research Analyst, Investors Alley

Hercules Capital (HTGC) just announced stellar quarterly earnings, so let's review this quality stock with an attractive 8% plus yield, suggests income expert Tim Plaehn, editor of The Dividend Hunter.

Thee company has carved out its own niche. HTGC is one of the oldest BDCs, founded in 2003 and into the market with a 2005 IPO.

The company is internally managed with a $1.15 billion market cap. In the BDC world, $1.15 billion, with a $1.8 billion enterprise value (market cap plus debt) is one of the larger companies.

What sets HTGC apart from its peers is its client focus. Hercules works with venture capital and private equity firms to provide funding for companies that are pre-IPO or being groomed for merger or acquisition.

The BDC provides funding primarily to various types of technology related companies. It makes only senior debt loans with maturities of 3 to 3 1/2 years.

About 90% of Hercules' assets are loan with 10% as equity positions that can pay off very well when a client goes public or is acquired. Equity profits and early termination fees have increased Hercules average effective returns to above 16%.

The company's relationships with over 500 venture capital type firms has allowed HTGC to steadily grow its book of business, and also steadily increase its annual dividend.

Hercules had a large amount of both debt and equity assets mature in 2014 into 2015. The balance of 2015 and 2016 were focused on bringing in new investments to replace the closed deals and to grow the investment portfolio.

Since 2010, the annual dividend has increased from $0.80 per share to $1.24 paid in 2014. The dividend has been flat for the last two years, but now the company is again in position to grow the per share payout.

HTGC currently yields 8.4%. This stock will be a nice addition to an income focused portfolio as long as the yield stays above 8%.

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