BDC Market Snapshot: Week Ended April 21, 2023
In a shameless act of self-promotion, we are re-publishing our recently completed weekly Market Snapshot published in our sister publication – BDC Best Ideas. Every weekend, we discuss our Expected Return Table where we project over the long term, the outlook for every public BDC’s annual distribution through 2027; offer up a Price Target and a Total Return. Anyone looking to put new money to work in the BDC sector can see for themselves what we believe are the most attractive choices and what you might earn – if we’re right. We like to think this is an excellent starting point for any would-be BDC investor with a long-term perspective.
By the way, we’re believers in buying and holding the right BDC stocks for the long term, rather than the more common practice recommended by most analysts and tipsters on financial sites of buying and selling in relatively short time periods. According to a study conducted by the NYSE, the average holding period for a stock is 5.5 months. By contrast, BDC Best Ideas is advocating for a hold time of at least ten times longer. First of all, a long-term perspective meshes with the life cycle of most BDC assets, which typically involve a 3-7 year time frame. You also get the benefit of accumulating with every monthly or quarterly distribution an ever greater return as BDCs are required to pay out almost all their earnings to their shareholders. You don’t collect a lot of distributions in 5.5 months…
Warren Would Be Proud
In fact, if you find the right BDCs to buy, you might be tempted by the high dividends you’re receiving to ignore any future increase in their price and hold on “forever” – itself not a bad strategy. Seeking Alpha data shows that of the 27 BDCs that can show a 10-year history as a public company, 15 generated returns over 100%, including several which have exceeded 300%. In fact, if you’d bought all those BDCs back in 2013, 90 % of them would have gone on to generate a positive total return and only 10% a loss. The median total return was 107%, or more than 10% per annum in a period that has included an oil crisis; a pandemic, and the current whatever-this-is.
BDC Best Ideas – building on the research we’ve undertaken in the BDC Reporter and the BDC Credit Reporter – seeks to identify the “Best Ideas” for the future. These change over time as returns change constantly with prices, so the Expected Return Table is updated in real-time. Subscribers can check in at any time and see what looks most promising at the moment. (We are still in Beta mode for a short time longer as we refine our message and the website, so there’s no cost as yet. Please feel free to check us out: www.bdcbestideas.com).
Back To The Snapshot
A theme of late – which we’ve returned to in this week’s Market Snapshot – is that the currently depressed market conditions for BDC stocks represent an excellent buying opportunity for anyone who shares our view that BDC earnings and distributions are headed higher and that – eventually – price multiples will revive. It’s a tough sell in today’s environment given the palpable fear of an impending recession and potentially great damage to BDCs from credit losses down the road. However, if our projections – which take all those factors into account – are correct and you hang in there for several years, total returns in the BDC sector are unusually attractive. Of course, our projections and assumptions could be wrong so caveat emptor as with any investment recommendation.
Republished from BDC Best Ideas:
BDC Market Snapshot: Week Ended April 21, 2023
The week ending April 21 was another quiet one, both in terms of news developments and BDC price changes. As we noted in the BDC Reporter’s Common Stocks Market Recap for the period, investors seem to be in a “wait-and-see” mode after the Silicon Valley Bank (SVB) failure, which caused prices to swoon. Likewise – except for an occasional preview or filing – the BDCs themselves don’t have much to say, probably busy getting their investment presentations ready for May’s earnings season.
Main Street Capital (MAIN) – for reasons that are unclear to us – followed in the footsteps of Capital Southwest (CSWC) and offered up a preview of several key IQ 2023 metrics, which we discussed at great length in the BDC Reporter. Nothing was said explicitly about future dividends – the subject of most interest to BDC Best Ideas – but there was much hinting of future increases. Here is the exact language used in MAIN’s press release:
…”based on our strong first-quarter results, we expect another meaningful supplemental dividend to be paid in the second quarter of 2023, which would represent our seventh consecutive quarterly supplemental dividend and would result in another quarter in which we provide significant additional value to our shareholders.”
Through the first half of 2023, MAIN has paid or announced $1.5250 in total distributions – both regular and special – which annualizes to $3.0500 per share, already better than 2022’s total payout of $2.9450. However, we’re projecting MAIN’s final dividend count will come to $3.6000, so we’re counting on further distribution increases in 2023.
Another nearly 20% increase in the payout may seem aggressive but the recent preview press release did indicate that MAIN’s Net Investment Income Per Share in the IQ 2023 would be in the range of $1.01-$1.03. Using the mid-range number and annualizing, we get a NIIPS of $4.08. Our payout projection for 2023 in the Expected Return Table might be 22% higher than 2022’s actual result, but could still be too low…
There’s a good chance that both the analyst consensus for NIIPS in the IQ 2023 and our own projections for BDC distributions for the year as a whole could be on the low side. Analyst projections tend to be set low, so exceeding expectations may not be a great surprise to investors familiar with these BDCs. In our case, we’ve all along tried to take into account the impact of higher rates and how they are generating record distributions, but it’s difficult to nail down exactly given a host of other factors such as dividend payout policy; tax regulations; the impact of realized gains and losses, etc. Earnings are projected to jump 11.2% but could jump 15%. Dividends – going by our numbers – should be growing by 9.5%, but that might rise by 12.0% or more.
Higher For Longer
If that wasn’t enough, what we’re hearing from the Fed and the thousands of institutions, analysts, and commentators who hang on their every word and translate for us, is very encouraging for BDC distributions in 2024 as well. At the moment, we project peak BDC earnings will occur in the IVQ 2023, but 2024 might not see much of a downshift, as the Fed may need to keep rates pretty close to peak levels for many quarters yet. As a result, we’re ever more comfortable that our projection that total BDC distributions in 2024 will be flat with 2023‘s record-setting level is reasonable.
Outside of the level of interest rates, the largest”known unknown” is the impact of credit losses – whether in the form of non-performing loans on income or net realized losses. On one hand, the data is showing that defaults, bankruptcies, and the like are running at much higher levels across the leveraged finance space than in 2021 and 2022. Moreover, there’s a consensus amongst the rating agencies and other professional doom-sayers that things are going to get worse before they get better. Our own research at the BDC Credit Reporter confirms all of that where the public BDC sector is concerned.
However, the losses that we anticipate showing up in the IQ 2023 results and for the rest of 2023, fall within our expectations when we were making our payout projections. What we still don’t see – nor do the rating groups by the way – are the catastrophic losses that would materially erode BDC earnings, capital, and distributions. Into every BDC’s life, some rain must fall – after two years of drought – but not the sort of deluge that would materially affect their future prospects. We don’t expect the IQ 2023 BDC results to change our view, given what we know. If we’re going to be wrong about BDC credit performance, the hard data has yet to show up and may not be with us – if at all – till late in 2023 at the earliest.
The “Great Uncertainty” – to coin a phrase – that has been hanging over the BDC sector since the spring of 2022 shows no sign of dissipating either in the short or medium term. We may not get a break in the miasmic cloud till 2024. As a result, it’s unlikely that BDC investors – despite their predilection for looking ahead – will be jumping back in with both feet into buying BDC stocks for some time. For BDC investors with money to spend, this extends the already long period in which most stocks are trading at huge discounts to their prospective values and at high yields.
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