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BDCs: High Yields in Finance
08/29/2014 8:00 am EST
Income expert Briton Ryle highlights a pair of financing firms—known as Business Development Companies—that are both ongoing buys in the model portfolio of his The Wealth Advisory.
Triangle Capital (TCAP)
There are 65,000 companies in the US that have revenue between $20 million and $250 million. Over 90% of these companies are privately held, which means they can’t sell stock to raise money. It is these companies that depend on investment companies like Triangle Capital for financing.
As a testament, since it went public in 2007, Triangle has grown its assets under management from $125 million to $1 billion, and net investment income has gone from $3.2 million to $60 million. The quarterly dividend has grown from $0.15 a share to $0.54.
Triangle made $87 million in new investments. In addition to the quarterly dividend, the company returned another $0.15 a share in 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 is among the most efficient of the investment companies known as Business Development Companies, or BDCs. It has lower administrative costs and better returns than just about any of its competitors.
For the second quarter, Triangle reported $0.53 in earnings per share, a penny better than estimates. Full-year 2014 earnings estimates were revised higher, from $2.15 to $2.20 a share. Triangle also announced a secondary offering of 4.9 million shares at $26.85 that netted the company $127 million.
Prospect Capital (PSEC)
Our other Business Development Company stock, Prospect Capital, has recovered all of the losses (+10%) suffered after its business structure was questioned by the SEC.
Prospect responded quickly and won a concession from the SEC. The case is now closed and Prospect recently had its credit facility increased by the banks involved.
Basically, this means certain banks voluntarily raised the amount of money they are willing to lend Prospect. That’s a good sign that this company is doing well.
Prospect Capital has an investment portfolio worth over $6 billion and trades at a slight discount to net asset value. The company is very selective about where it invests: It’s reported that less than 2% of investments it reviews are actually made. The current yield is nearly 13%, and it’s paid monthly.
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