New Feature: BDC Dividend OutlookPremium Free
The BDC Reporter has been promising to publish its internal evaluation of every public BDCs current regular distribution’s sustainability for months. Holding us up is both the scale of the project – rating all 46 publicly traded funds- and creating a format that is easy to use and understand for our readers. With the end of the latest earnings season we’ve been able to review every BDC in turn and our internal evaluations of prospective distribution levels. As you’ll see by reviewing this first iteration of the BDC Dividend Outlook Table – which will join the Daily News Table and the Fixed Income Table as staple Premium features – we forecast the probability of each BDC’s distribution in one of three categories: UNCHANGED, AT RISK and DECREASE. You can find the BDC Dividend Outlook Table on the front page in the Tools section, or click here.
Of course, what we are seeking to do is what all other investors in the BDC market are also doing, as reflected in the price levels of BDC. Our rule of thumb – which has both the benefits and disadvantages of any generalization – is that when BDC investments are yielding under 10.0%, the market typically believes the current distribution level is safe and will continue: i.e. UNCHANGED. When a BDC yields in the low teens: between 10% and 12% we assume the market has some doubts about sustainability or what we rate AT RISK. When a BDC yields more than 12%, we presume that the market believes a reduction is coming within the foreseeable future, which is equivalent to our DECREASE rating.
For every BDC, the Dividend Outlook Table shows you a wealth of information.
First, there’s the year in which the BDC went public, or IPO Year.
Second, we list the Current Stock Price, which is based on a stock market feed that’s typically 10 minutes delayed.
Third, there’s the Current Dividend, expressed in an annualized form. We don’t include Special Distributions as yet.
Third, there’s the Current Yield, which is a function of the two prior numbers, expressed as a percentage.
Fourth, there’s the Dividend Streak. This represents the number of quarters which the Current Dividend has been paid.
A short streak might imply either a dividend has been increased recently or reduced.
Fifth, to make the prior column clearer we note the last period when the distribution was changed.
We use color coding, so Red means a reduction and Green means an increase.
Sixth, the “Dividend Announced To ? ” column reflects the latest BDC announcement of the schedule of their pay-outs, which we update while we are tracking the Daily News.
The seventh and eighth columns reflect what the market seems to expect about the sustainability of the distribution – as we discussed above – and the BDC Reporter’s own view.
Most times the BDC Reporter and the markets seem to “agree”, at other times we are more optimistic or pessimistic.
The “Coverage Began” column shows the month which we first rated the dividend outlook and the “Projection Date” shows over what period our assessment stands.
We are beginning this review at the end of 2017 and projecting out to the end of 2018.
As we make changes to a particular BDC’s Outlook, we’ll note the change and the date thereof.
Finally, the last 3 columns show what the current yields are for every BDC, sorted by their Outlook, as projected by the BDC Reporter
As you might expect, BDCs whose distribution is expected to remain UNCHANGED yield less than those AT RISK or more likely to DECREASE.
HOW TO USE THE DIVIDEND OUTLOOK TABLE
No Stock Tips Here
As regular readers must know by now, the BDC Reporter does not tell any reader what we think they should do, and what to buy and what to sell.
Those decisions are best left to you, and are the end result of a multitude of factors.
However, we have no problem sharing with our Premium subscribers how we are investing our own capital and why.
Just about every BDC Daily News article includes a discussion of our investment approach.
Moreover, we provide full details to all readers in our Investment Disclosure Table about what we own, and what we buy and sell along the way.
We offer up the Dividend Outlook Table in a similar spirit.
The conclusions we draw about BDCs dividend sustainability are based on our internal evaluations, and may or may not prove to be correct.
There are a multitude of factors involved and much can change over the time period involved.
Even if we are right every time, that is no guarantee of a successful investment.
BDC prices can fluctuate for a variety of reasons.
Why Dividends Matter (To Us)
Nonetheless, where BDCs are concerned the key factor determining market value is the discounted cash flow which investors expect to receive over time.
We use our Dividend Outlook projection to help us determine which BDCs might be over-valued or under-valued, and invest accordingly.
(Which is one of the reasons we compare our conclusions against those of the market – as reflected in the BDC yields that we discussed above).
Readers can use our ratings as a starting point – or an additional data point – to agree or disagree with us and draw their own conclusions.
We’ll be regularly publishing articles explaining our conclusions for each BDC we track to flesh out the reasons behind the ratings.
Moreover, as we continue to track developments in the Daily News, we’ll alert readers almost immediately to any changes in our viewpoint.
We’ve included a column in the Daily News Table called “Change In Dividend Outlook” which will warn Premium readers if anything we learn along the way causes us to change our views of a dividend’s outlook.
That could be an increase in bad loans; an unexpected rise in costs or a decrease in income; leverage troubles, etc.
Generally, though, the recurring reason for most payout changes comes from credit losses – either actual or anticipated.
We looked down our own list and counted 17 BDCs which have cut their distribution in the last 4 quarters.
In each case – with the possible exception of CGBD – every dividend reduction has been accompanied by material credit losses that range from moderate to disastrous.
Predicting which BDCs might maintain their distributions and which might not will always be the central challenge for any long term BDC investor.
As the Summary at the very top of the table shows, the BDC Reporter projects that 28 BDC payouts will remain UNCHANGED in 2018; 13 are AT RISK and 5 will DECREASE. The respective numbers for the market’s perspective – based upon our yield assumptions – are similar, but not identical.
Our projections indicate 39% of BDCs are in danger of having to cut their payout in the year ahead,but only 10% seem to be a forgone conclusion.
By way of comparison, in calendar 2017 17 BDCs reduced their regular distributions, or 37%.Already a Member? Log In
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