Focus of Article:
The focus of this two-part article is a very detailed analysis comparing Ares Capital Corp. (ARCC) to some of the company’s business development company (“BDC”) peers (all sector peers I currently cover). I am writing this two-part article due to the continued requests that such an analysis be specifically performed on ARCC and some of the company’s BDC peers at periodic intervals. For readers who just want the summarized conclusions/results, I would suggest to scroll down to the “Conclusions Drawn” section at the bottom of each part of the article.
PART 1 of this article analyzed ARCC’s recent quarterly results and compared several of the company’s metrics to fourteen BDC peers. PART 1 helps lead to a better understanding of the topics and analysis that will be discussed in PART 2. The link to PART 1’s analysis is provided below:
Ares Capital’s NAV, Dividend, And Valuation Vs. 14 BDC Peers (Post Q2 2020 Earnings – Very Attractive Valuation)
PART 2 of this article compares ARCC’s recent dividend per share rates, yield percentages, and several other highly unique dividend sustainability metrics to fourteen BDC peers. This analysis will show recent past data with supporting documentation within Table 3 below. This article will also project each company’s dividend sustainability for the calendar fourth quarter of 2020 which is partially based on the metrics shown in Table 3 and several additional metrics shown in Table 4 below.
By analyzing these metrics, one will better understand which BDC generally has a safer dividend rate going forward versus other peers who have a higher risk for a dividend decrease or a higher probability of a dividend increase and/or a special periodic dividend being declared. This is not the only data that should be examined to initiate a position within a particular stock/sector or project future dividend per share rates. However, I believe this analysis would be a good “starting-point” to begin a discussion on the topic. At the end of this article, there will be a conclusion regarding various comparisons between ARCC and the fourteen BDC peers. In addition, I will provide my current BUY, SELL, or HOLD recommendation and price target on ARCC. I will also include my dividend sustainability projection for the calendar fourth quarter of 2020 and current BUY, SELL, or HOLD recommendation for the fourteen other BDC peers within this analysis.
Side Note: As of 9/25/2020, ARCC, Apollo Investment Corp. (OTC:AINV), FS KKR Capital Corp. (FSK), Gladstone Investment Corp. (GAIN), Golub Capital BDC Inc. (GBDC), NEWTEK Business Services Corp. (NEWT), Oaktree Strategic Income Corp. (OCSI), Oaktree Specialty Lending Corp. (OCSL), PennantPark Floating Rate Capital Ltd. (PFLT), Solar Capital Ltd. (SLRC), Blackrock (BLK) TCP Capital Corp. (TCPC), and Sixth Street Specialty Lending Inc. (TSLX) had a stock price that “reset” lower regarding each company’s special periodic dividend and/or regular September 2020 monthly/quarterly dividend accrual. In other words, each company’s “ex-dividend date” has occurred. Main Street Capital Corp. (MAIN), Owl Rock Capital Corp. (ORCC) and Prospect Capital Corp. (PSEC) had stock prices that have not reset regarding each company’s regular quarterly/ September 2020 monthly dividend accrual (including ORCC’s special periodic dividend). Readers should take this into consideration as the analysis is presented below.
It should also be noted FSK recently implemented a 1:4 reverse stock split on 6/15/2020. As such, for every 4 shares of FSK owned, a shareholder now has 1 share of FSK stock after this event occurred. When it comes to FSK’s impacted metrics, all changes were incorporated starting on 7/1/2020 when it comes to my tables, models, and spreadsheets (start of the calendar third quarter of 2020).
Dividend Per Share Rates and Yield Percentages Analysis – Overview:
Let us start this analysis by first getting accustomed to the information provided in Table 3 below. This will be beneficial when comparing ARCC to the fourteen BDC peers regarding quarterly dividend per share rates and yield percentages.
Table 3 – Dividend Per Share Rates and Yield Percentages
(Source: Table created entirely by myself, obtaining historical stock prices from NASDAQ and each company’s dividend per share rates from the SEC’s EDGAR Database)
Using Table 3 above as a reference, the following information is presented in regards to ARCC and fourteen BDC peers (see each corresponding column): 1) dividend per share rate for the calendar second quarter of 2020 (including any special periodic dividend); 2) stock price as of 6/19/2020; 3) trailing 12-month (“TTM”) dividend yield (dividend per share rate from the calendar third quarter of 2019-second quarter of 2020 [includes all special periodic dividends]); 4) annual forward dividend yield based on the dividend per share rate for the calendar second quarter of 2020 using the stock price as of 6/19/2020 (for monthly dividend payers, the latest monthly dividend per share rate during the quarter); 5) annual forward dividend yield based on the dividend per share rate for the calendar second quarter of 2020 using the NAV as of 6/30/2020 (for monthly dividend payers, the latest monthly dividend per share rate during the quarter); 6) TTM dividend increase (decrease) percentage (for monthly dividend payers, dividend per share rate fluctuation from June 2019-June 2020); 7) dividend per share rate for the calendar third quarter of 2020 (including any special periodic dividend); 8) stock price as of 9/25/2020; 9) TTM dividend yield (dividend per share rate from the calendar fourth quarter of 2019-third quarter of 2020 [includes all special periodic dividends]); 10) annual forward dividend yield based on the dividend per share rate for the calendar third quarter of 2020 using the stock price as of 9/25/2020 (for monthly dividend payers, the latest monthly dividend per share rate during the quarter); 11) annual forward dividend yield based on the dividend per share rate for the calendar third quarter of 2020 using my projected CURRENT NAV (NAV as of 9/25/2020; for monthly dividend payers, the latest monthly dividend per share rate during the quarter); and 12) TTM dividend increase (decrease) percentage (for monthly dividend payers, dividend per share rate fluctuation from September 2019-September 2020). Let us now begin the comparative analysis between ARCC and the fourteen BDC peers.
Analysis of ARCC:
Using Table 3 above as a reference, ARCC declared a dividend of $0.40 per share for the second quarter of 2020. This amount was unchanged when compared to the prior quarter. ARCC’s stock price traded at $14.85 per share on 6/19/2020. When calculated, this was a TTM dividend yield (including special periodic dividends when applicable) of 11.04%, an annual forward yield to ARCC’s stock price as of 6/19/2020 of 10.77%, and an annual forward yield to my projected CURRENT NAV as of 6/19/2020 of 10.03%. When comparing each yield percentage to ARCC’s BDC peers within this analysis, the company’s TTM yield based on its stock price as of 6/19/2020 was now modestly (at or greater than 1.00% but less than 2.00%) below average, its annual forward yield based on its stock price as of 6/19/2020 was now slightly (at or greater than 0.50% but less than 1.00%) below average, and its annual forward yield to my projected CURRENT NAV remained near (less than 0.50%) average.
When combining this type of data with various other analytical metrics, in November 2018 and July 2019 I correctly projected, within the following prior ARCC dividend sustainability articles, the company had a high probability of a dividend per share rate increase during 2019; including projecting a special period dividend which ultimately came to fruition:
Ares Capital’s Detailed Dividend Sustainability Analysis (Includes 2019 Dividend Projections)
Ares Capital’s Dividend Sustainability Through The First Half Of 2020 (Includes Special Periodic Dividend Projection)
To provide readers several additional, important metrics to consider regarding each BDC’s dividend sustainability, Table 4 is provided below. Again, it should be noted there are additional dividend sustainability metrics that I perform for each company. However, those metrics are more elaborate in detail and require additional analysis/discussion which I believe is beyond the scope of this particular article. That type of analysis would be better suited when analyzing each company on a “standalone” basis versus a comparison article. I have discussed some of these more elaborate metrics in prior ARCC, GAIN, MAIN, NEWT, OCSI, OCSL, PSEC, SLRC, and TSLX articles (see my profile page for links to prior articles regarding those companies).
Table 4 – Several Additional Dividend Sustainability Metrics (6/30/2020 Versus 6/30/2019)
(Source: Table created entirely by myself, partially using data obtained from the SEC’s EDGAR Database [link provided below Table 3])
Using Table 4 above as a reference, a very important metric to consider regarding a BDC’s long-term dividend sustainability is each company’s cumulative UTI outstanding shares of common stock ratio (highly valuable “forward-looking” data). Cumulative UTI is “built up”/retained net investment company taxable income (“ICTI”) in excess of previously paid dividend distributions since an entity’s initial public offering (“IPO”) or after the most recent tax year when an entity overdistributed its TI with no such surplus to offset the difference. This figure/metric has been covered, at length, in previous BDC dividend sustainability articles. To calculate this ratio, I take a company’s cumulative UTI and divide this amount by its outstanding shares of common stock. The higher this ratio is, the more positive the results regarding a company’s future dividend sustainability. Since most BDC peers have continued to gradually net increase their outstanding shares of common stock, this ratio shows if a company has been able to increase its cumulative UTI balance by a similar proportion.
ARCC had a cumulative UTI coverage of outstanding shares of common stock ratio of 1.10 as of 6/30/2020 (see blue reference “C”). When calculated, this was a 0.04 increase during the TTM. Simply put, ARCC continued to have a very attractive net ICTI surplus to distribute over the foreseeable future. ARCC’s ratio, both as of 6/30/2019 and 6/30/2020, was notably more attractive versus the mean of 0.35 and 0.39 of the fifteen BDC peers within this analysis, respectively. Only TSLX had a higher ratio as of 6/30/2019 and 6/30/2020. This remains a very positive catalyst/trend to consider and was the main reason ARCC distributed special periodic dividends throughout 2019 and will likely maintain the company’s quarterly dividend throughout 2020 and at least through the first half of 2021.
In my opinion, another important metric to consider regarding a BDC’s dividend sustainability is a company’s weighted average annualized yield on its debt investments (asset side of the balance sheet). ARCC had a weighted average annualized yield on the company’s debt investments of 8.90% as of 6/30/2020 (see blue reference “D”). This percentage was now slightly above the mean of 8.75% of the fifteen BDC peers within this analysis. ARCC’s weighted average annualized yield on the company’s debt investments decreased (1.50%) during the TTM without any material change in portfolio characteristics or notable rise in credit risk. This should also be seen as a “cautious”/negative factor/trend as this partially mitigates ARCC’s very large cumulative UTI balance. This was consistent with the overall trend within the BDC sector due to the recent decrease in the U.S. London Interbank Offered Rate (“LIBOR”) during 2019-2020 (various debt investments “reset” this past quarter). Prior to the recent coronavirus (COVID-19) sell-off/panic, there was some 2019 “spread/yield compression” due to the recent suppression of long-term rates/yields. As I correctly previously pointed out, LIBOR across all tenors/maturities has continued to decrease which has lowered this metric, to varying degrees, across basically all BDC peers over the past year and a half. This notion has been taken into consideration when it comes to projected dividend per share rates and recommendation ranges provided towards the end of this article.
Over the TTM, no BDC peer within this analysis experienced a net increase in its weighted average annualized yield. With that said, due to the COVID-19 pandemic, spreads across speculative-grade credit/high yield debt initially experienced a quick, notable “spike” in yields (at its peak by approximately 800 basis points [bps]). The severity of broader credit spread increases/widening was the most notable in speculative-grade credit/high yield debt (typically bear the most risk). With that said, with notable stimulus by the Federal (“Fed”) Reserve/ U.S. Treasury within certain pockets of broader credit markets, markets notably “calmed down” as the calendar second quarter of 2020 passed. This overall sentiment “rippled” through broader markets; including speculative-grade credit/high yield debt. During the calendar second quarter of 2020, average high yield spreads/yields narrowed/decreased by approximately 500 bps. This general trend has continued, for the most part, during the calendar third quarter of 2020 (just to a lesser degree). During the calendar third quarter of 2020, average high yield spreads/yields narrowed/decreased by approximately 50-100 bps.
Since loan originations basically “fell off a climb” at the height of the COVID-19 pandemic, most BDCs did not “lock in” new loan originations at notably higher effective stated interest rates. That said, spreads/yields on new originations within speculative-grade credit/high yield debt should still remain higher when compared to new loan originations in 2019-early 2020. Simply put, risk-adjusted premiums have recently slightly-modestly net increased. This will partially mitigate the continued decrease in LIBOR when it comes to all BDC peers’ floating-rate debt investments that DO NOT have higher cash LIBOR floors.
The next metric shown in Table 4 is each BDC’s proportion of debt investments with floating interest rates (asset side of the balance sheet; additional forward-looking data). ARCC’s proportion of debt investments with floating interest rates was 94.38% as of 6/30/2020 (see blue reference “E”). ARCC’s continuous high floating-rate percentage was attractive during the rising interest rate environment of 2017-2018. This was the main reason why ARCC’s NII experienced a fairly consistent, steady growth during 2018 as the Fed Funds Rate and U.S. LIBOR gradually increased. This was one the main reasons why I originally initiated, and subsequently increased, my position in ARCC during certain periods of market volatility during the latter half of 2018. Simply put, I knew “ahead of time” per se that ARCC’s NII would continue to increase as 2018 progressed.
However, as noted above, LIBOR gradually decreased during 2019 which “accelerated” in 2020 as a direct result of the COVID-19 pandemic. As such, these types of loans have recently experienced a net decrease in stated rates when compared to late 2018-2019. HOWEVER, most BDC peers have already moved below their weighted average cash LIBOR floor. While several BDC peers publicly disclose this figure, the majority of companies do not. Since I personally calculate/confirm each BDC’s weighted average cash LIBOR floor each quarter, I believe this is a strategic advantage thus have decided to not disclose these percentages to the public. This data, when combined with the other factors/metrics presented in this article (including several other factors not publicly disclosed), is used to determine dividend sustainability probabilities later in the article. Again, the severity of such a decrease will vary from BDC to BDC which I continually track/project.
The last metric shown in Table 4 above is each BDC’s weighted average interest rate on all debt outstanding (liability side of the balance sheet). ARCC had a weighted average interest rate of 3.37% on the company’s outstanding borrowings as of 6/30/2020 (excludes commitment fees and loan issuance costs; see blue reference “F”). This compared to a weighted average interest rate of 4.09% as of 6/30/2019. When compared to the fourteen BDC peers within this analysis, ARCC continued to have a slightly below average weighted average interest rate on all debt outstanding. As of 6/30/2020, 38.29% of ARCC’s debt outstanding bore floating-rates (credit facilities) while 61.71% of the company’s debt outstanding bore fixed-rates (convertible and unsecured notes). I believe taking a “snapshot” of each BDC’s weighted average interest rate on all debt outstanding allows readers to better understand which companies will experience generalized characteristics in the future (thus impacting future net investment income [NII]/TI). ARCC also had $3.3 billion of available capital to deploy as of 6/30/2020 (excluding previously unfunded commitments) which was a higher monetary amount versus any of the fourteen other BDC peers within this analysis (a positive catalyst/trend).
Once again using Table 3 as a reference, ARCC declared a dividend of $0.40 per share for the third quarter of 2020. This was unchanged when compared to the prior quarter. This gets back to the notion ARCC continues to have amble cumulative UTI to distribute net ICTI to shareholders.
ARCC’s stock price traded at $13.70 per share on 9/25/2020. When calculated, this was a TTM dividend yield (including special periodic dividends when applicable) of 11.82%, an annual forward yield to ARCC’s stock price as of 9/25/2020 of 11.68%, and an annual forward yield to my projected CURRENT NAV of 10.06%. When comparing each yield percentage to ARCC’s BDC peers within this analysis, the company’s TTM yield based on its stock price as of 9/25/2020 was now slightly below average, its annual forward yield based on its stock price as of 9/25/2020 was now slightly above average, and its annual forward yield to my projected CURRENT NAV was now also slightly above average. However, this third percentage is not too alarming when it comes to ARCC’s dividend sustainability due to the company’s prior accretive acquisitions, attractive borrowing costs, and large cumulative UTI balance.
Various Comparisons Between ARCC and the Company’s Fourteen BDC Peers:
A large number of readers have continued to request that I provide yield percentages, dividend per share rates, and other metrics for the BDC stocks I currently cover in ranking order. As such, using Table 3 and Table 4 above as a reference, the following metrics are provided for ARCC and the fourteen BDC peers within this analysis:
TTM Yields as of 9/6/2019 and 9/25/2020, Respectively (Including Annual Dividend Change; Based on Lowest to Highest Percentage as of 9/6/2019) (Good General Indicator of “Back-Testing” Dividend Sustainability; Exceptions Apply):
1) MAIN: 6.75%; 9.02% (Stable Monthly Dividend; 1 Special Periodic Dividend Totaling $0.24 Per Share)
2) OCSL: 7.28%; 8.23% (11% Quarterly Dividend Increase)
3) GBDC: 7.58%; 10.59% (9% Quarterly Dividend Net Decrease; 1 Special Periodic Dividend Totaling $0.13 Per Share)
3) OCSI: 7.58%; 8.78% (19% Quarterly Dividend Decrease)
5) SLRC: 8.00%; 10.40% (Stable Quarterly Dividend)
6) GAIN: 8.45%; 11.18% (3% Monthly Dividend Increase; 2 Special Periodic Dividends Totaling $0.18 Per Share)
7) TSLX: 8.54%; 13.41% (5% Quarterly Dividend Increase; 4 Special Periodic Dividends Totaling $0.64 Per Share)
8) NEWT: 8.65%; 12.59% (Net Stable Quarterly Dividend)
9) ARCC: 8.72%; 11.82% (Stable Quarterly Dividend; 1 Special Periodic Dividend Totaling $0.02 Per Share)
10) ORCC: 8.99%; 12.22% (Stable Quarterly Dividend; 4 Special Periodic Dividends Totaling $0.28 Per Share)
11) PFLT: 9.82%; 13.90% (Stable Monthly Dividend)
12) TCPC: 10.75%; 14.14% (17% Quarterly Dividend Decrease)
13) AINV: 11.01%; 21.00% (31% Quarterly Dividend Decrease;1 Special Periodic Dividend Totaling $0.06 Per Share)
14) PSEC: 11.04%; 14.26% (Stable Monthly Dividend)
15) FSK: 14.46%; 17.24% (21% Quarterly Dividend Decrease)
When comparing each company’s TTM dividend yields, a general conclusion that can be drawn is that the lower a company’s percentage was as of 9/6/2019, the lower the probability of a dividend decrease (or the higher the probability of a stable/increasing dividend) during the calendar fourth quarter of 2019-third quarter of 2020 (and vice versa). Again, there are some exceptions to this general “trend” at periodic intervals (for instance companies who experience a “spike” in non-accruals) but I believe one can see some patterns arise when analyzing this specific metric.
For instance, since MAIN, OCSL, SLRC, GAIN, TSLX, NEWT, ARCC, ORCC, and PFLT (ranks 1, 2, and 5-11 in respective order) had a relatively low (below 10.00%) TTM dividend yield as of 9/6/2019, I do not believe it was a surprise each company either had a stable or increasing dividend per share rate during the calendar fourth quarter of 2019-third quarter of 2020 (in MAIN’s, GAIN’s, TSLX, ARCC’s, and ORCC’s case also declaring special periodic dividends). Regarding OCSI, this BDC’s largest portfolio company, OCSI Glick JV LLC (OCSI Glick JV), was put on non-accrual status during the calendar first quarter of 2020. As such, a notable amount of interest income (proportionately speaking) was not be recorded in the calendar second quarter of 2020. Regarding GBDC, this BDC recently completed a fairly large dilutive equity offering which negatively impacted NAV while also recently recording several new non-accrual investments which negatively impacted NII/net ICTI.
I also believe it was not that much of a surprise TCPC (rank 12), AINV (rank 13), and FSK (rank 15) recently declared a notable (at or greater than 10%) dividend decrease. Simply put, these three BDC peers were at the bottom of this list as of 9/6/2019. Technically, PSEC (rank 14) continues to have heightened risk of a dividend reduction (including the fact this BDC has no cumulative UTI). That said, management owns a great deal of PSEC stock and surely knows any dividend reduction would directly result in a notable reduction in stock price (which likely influences the Board of Director’s ultimate decision to continue keep an unchanged dividend per share rate). Still, pressure continues to mount.
Annual Forward Yield Based on Stock Price as of 9/25/2020 (Based on Lowest to Highest Percentage) (Another Good General Indicator of Near-Term Dividend Sustainability; Exceptions Apply):
1) OCSI: 7.84%
2) MAIN: 8.22%
3) OCSL: 8.86%
4) GBDC: 8.96%
5) GAIN: 9.26%
6) TSLX: 9.73%
7) ORCC: 9.97%
8) SLRC: 10.40%
9) ARCC: 11.68%
10) TCPC: 12.30%
11) NEWT: 12.75%*
12) PFLT: 13.90%
13) PSEC: 14.26%
14) AINV: 15.14%
14) FSK: 15.21%
* = In regards to NEWT’s higher forward yield and low weighted average yield on debt investments percentage, it should be noted a sizable percentage of the company’s net ICTI comes from capital gains associated with the sale of its small business administration (“SBA”) Section 7a government-guaranteed loans, in the future a likely proportion within SBA 504 loans, its recently created joint venture with TCPC, and most recently the origination of the government-guaranteed Personal Projection Program (“PPP”) loans. Premiums associated with the Section 7a loans have ranged between 9%-13% over the past 5+ years. Simply put, these premiums have remained fairly consistent, even during times when other pockets of debt/credit markets have experienced heightened volatility when it comes to pricing/yields. In addition, NEWT continually recognizes recurring dividend income from some of the company’s control investments. As such, NEWT’s low weighted average annualized yield on debt investments is a bit deceiving when it comes to dividend sustainability/yields. In a nutshell, NEWT has a more unique business model when compared to the fourteen BDC peers within this analysis. In addition, NEWT’s quarterly dividend per share rate is “seasonal”. Simply put, lower dividend per share rates are typically declared during the first and second quarters of any given calendar year while higher dividend per share rates are typically declared during the third and fourth quarters.
Annual Forward Yield Based on My Projected CURRENT NAV (Based on Lowest to Highest Percentage) (A Very Good General Indicator of Near-Term Dividend Sustainability; Exceptions Apply):
1) OCSI 5.81%
2) OCSL: 6.77%
3) GAIN: 7.71%
4) SLRC: 8.16%
5) GBDC: 8.17%
6) AINV: 8.21%
7) ORCC: 8.32%
8) PSEC: 8.83%
9) PFLT: 9.34%
10) TCPC 9.76%
11) ARCC: 10.06%
11) TSLX: 10.06%
13) FSK: 10.67%
14) MAIN: 11.66%
15) NEWT 14.78% (different business model; see “*” note above)
Regarding this specific metric, I would point out this type of comparative analysis a couple years ago correctly identified PSEC with heightened risk of a near-term dividend reduction. It was determined PSEC had the second highest annual forward yield of 10.60% based on each company’s NAV as of 6/30/2017. It also identified, at the time, several other BDC peers during each respective time period. More recently, this metric correctly identified AINV, FSK, and TCPC as having a higher risk for a dividend reduction in the near future. As we now know, all three BDC peers notably reduced the company’s quarterly dividend in the calendar second or third quarter of 2020. Simply put, I believe this specific metric has proven to be highly useful.
Weighted Average Annualized Yield on Debt Investments as of 6/30/2020 (Based on Highest to Lowest Percentage) (Another Very Good General Indicator of Near-Term Dividend Sustainability; However Also Generally Heightens Risk for Investment Depreciation [Risk Versus Reward Metric]):
1) GAIN: 11.80% (1.3% Net Decrease When Compared to 6/30/2019)
2) PSEC: 11.40% (1.7% Net Decrease When Compared to 6/30/2019)
3) TSLX: 10.00% (1.2% Net Decrease When Compared to 6/30/2019)
4) SLRC: 9.85% (0.92% Net Decrease When Compared to 6/30/2019)
5) TCPC: 9.80% (1.2% Net Decrease When Compared to 6/30/2019)
6) MAIN: 9.49% (1.18% Net Decrease When Compared to 6/30/2019)
7) ARCC: 8.90% (1.5% Net Decrease When Compared to 6/30/2019)
8) FSK: 8.70% (1.8% Net Decrease When Compared to 6/30/2019)
9) AINV: 8.10% (1.7% Net Decrease When Compared to 6/30/2019)
9) OCSL: 8.10% (0.6% Net Decrease When Compared to 6/30/2019)
11) ORCC: 7.90% (1.2% Net Decrease When Compared to 6/30/2019)
12) GBDC: 7.70% (0.9% Net Decrease When Compared to 6/30/2019)
13) PFLT: 7.40% (1.5% Net Decrease When Compared to 6/30/2019)
14) NEWT: 6.26% (2.05% Net Decrease When Compared to 6/30/2019; different business model [see “*” note above])
15) OCSI: 5.90% (1.9% Net Decrease When Compared to 3/31/2019)
Cumulative UTI Outstanding Shares of Common Stock Ratio as of 6/30/2020 (Based on Highest to Lowest Ratio) (Great Indicator of Dividend Sustainability and Potential for Future Special Periodic Dividends; Solely for The REIT Forum Subscribers):
The REIT Forum Metric
2) ARCC: 1.10 (0.96 as of 6/30/2019)
This specific metric also identified that TSLX has a very large cumulative UTI balance as of 3/31/2020. As such, it was no surprise TSLX declared two special periodic dividends of $0.25 per common share during the calendar second quarter of 2020. Simply put, TSLX had so much cumulative UTI that the company needed to distribute this “built up” surplus to satisfy the Regulated Investment Company (“RIC”) requirements set forth by the Internal Revenue Code (“IRC”) (even when utilizing the spillback provision). This is why it is a very high (90%) probability TSLX will once again start declaring a quarterly special periodic dividend beginning in the calendar fourth quarter of 2020.
Conclusions Drawn (PART 2):
This article has compared ARCC and fourteen BDC peers in regards to recent dividend per share rates, yield percentages, and several other highly unique dividend sustainability metrics. This article also discussed ARCC’s dividend sustainability through the calendar first half of 2021. Using Table 3 above as a reference, the following were the recent dividend per share rates and yield percentages for ARCC:
ARCC: Dividend of $0.40 per share for the calendar third quarter of 2020; 11.82% TTM dividend yield (when including special periodic dividends); 11.68% annual forward yield to the company’s stock price as of 9/25/2020; and 10.06% annual forward yield to my projected CURRENT NAV.
Since ARCC had a fairly similar TTM weighted average annualized yield decrease on the company’s debt investments when compared to the sector peers within this analysis (a neutral factor/trend), a very attractive cumulative UTI balance (a very positive catalyst/trend), a slightly below average interest rate on all debt outstanding (a positive catalyst/trend), and an above average percentage of floating interest rate debt investments (generally a positive catalyst/trend when LIBOR rises; becomes a negative factor/trend when LIBOR decreases), I believe the company should have an annual forward yield to its NAV near-slightly above the average of the fifteen BDC peers within this analysis.
When combining this data with various other analytical metrics not discussed within this specific article (including projected non-accrual rates as 2020-2021 progresses; some factors were covered in PART 1), I believe the likelihood of ARCC having a stable quarterly dividend through the end of calendar second quarter of 2021 remains relatively high (70% probability).
When combining the analysis above with various other analytical metrics not discussed within this specific article (some factors were covered in PART 1), the following probabilities regarding the fourteen BDC peer’s near-term dividend sustainability is provided:
TSLX: Very High (90%) probability of a stable-slightly increasing quarterly “base” dividend for the calendar fourth quarter of 2020 (very high [90%] probability of a special periodic dividend for the calendar fourth quarter of 2020).
NEWT: High (80%) probability of a steady-increasing quarterly dividend for the calendar fourth quarter of 2020 when compared to the calendar third quarter of 2020 (typical trend regarding this company).
AINV: High (80%) probability of a stable quarterly “base” dividend for the calendar fourth quarter of 2020 (high [80%] probability of a minor special periodic dividend for the calendar fourth quarter of 2020).
GAIN: Relatively high (70%) probability of a stable monthly dividend for October-December 2020 (Modest [50%] probability of a special period dividend for the calendar fourth quarter of 2020). ^
TCPC: Relatively high (70%) probability of a stable quarterly dividend for the calendar fourth quarter of 2020 (company recently reduced their quarterly dividend per share rate).
OCSL: Modest to relatively high (60%) probability of a stable-slightly increasing quarterly dividend for the calendar fourth quarter of 2020.
MAIN: Modest to relatively high (60%) probability of a stable monthly dividend for December 2002-February 2021 (low [20%] probability of a special periodic dividend for the second half of 2020. ^^
FSK, OCSI: Modest to relatively high (60%) probability of a stable quarterly dividend for the calendar fourth quarter of 2020 (both companies recently reduced their quarterly dividend per share rate).
ORCC: Modest to relatively high (60%) probability of a stable quarterly dividend for the calendar fourth quarter of 2020 (company has already declared a quarterly special periodic dividend of $0.08 for the fourth quarter of 2020).
PFLT: Modest (50%) probability of a stable monthly dividend for October-December 2020. ^
GBDC, SLRC: Relatively low-modest (40%) probability of a stable quarterly dividend for the calendar fourth quarter of 2020 (GBDC recently reduced the company’s quarterly dividend per share rate).
PSEC: Relatively low (30%) probability of a stable monthly dividend for November 2020-January 2021. ^^^
^ = Monthly dividends have currently been declared through September 2020 (per GAAP)
^^ = Monthly dividends have currently been declared through November 2020 (per GAAP)
^^ = Monthly dividends have currently been declared through October 2020 (per GAAP)
Looking back to prior dividend projections, I correctly projected Medley Capital Corp.’s (MCC) cumulative UTI balance would decrease to $0 during the calendar second half of 2018 and would remain at $0 during 2019. I also correctly projected a higher probability that FSK, OCSI, and TCPC would need to reduce each company’s quarterly dividend at some point in 2020. This analysis also correctly identified a high probability of a special periodic dividend for ARCC, GAIN, MAIN, and TSLX during 2019 (and in GAIN’s case an increased special periodic dividend). This analysis also previously correctly projected there was a higher probability MAIN, at the least, would need to reduce the company’s special periodic dividend (and in a more bearish case cease declaring this type of dividend). As we now know, MAIN suspended the company’s semi-annual special periodic dividend starting in the first half of 2020.
My BUY, SELL, or HOLD Recommendation:
From the analysis provided above, including additional factors not discussed within this article, I currently rate ARCC as a SELL when the company’s stock price is trading at or greater than a 10% premium to my projected CURRENT NAV (NAV as of 9/25/2020; $15.90 per share), a HOLD when trading at less than a 10% premium but greater than my projected CURRENT NAV, and a BUY when trading at or less than my projected CURRENT NAV. These ranges are unchanged when compared to my last public ARCC article (PART 1 of this article).
Therefore, I currently rate ARCC as a STRONG BUY.
As such, I currently believe ARCC is notably undervalued from a stock price perspective. My current price target for ARCC is approximately $17.50 per share. This is currently the price where my recommendation would change to a SELL. The current price where my recommendation would change to a HOLD is approximately $15.90 per share.
Even with the continued decrease in U.S. LIBOR (which has continued to have a more negative impact on floating-rate debt investments with no/a low LIBOR floor), ARCC’s “cushion” to maintain the company’s quarterly dividend per share rate of $0.40 per share remains better than most peers. With that said, if the COVID-19 pandemic “persists” into 2021, the severity of overall loan non-accruals/write-offs/restructurings will be higher which would impact the entire BDC sector. I still believe SOME current stock price valuations (including ARCC) have already priced in MOST of this more “bearish” outcome. However, I believe that is NOT the case with all BDC stocks.
As of 9/25/2020, I currently have a STRONG BUY recommendation on the following BDC stock analyzed above: 1) ARCC; 2) SLRC; and 3) PFLT
As of 9/25/2020, I currently have a BUY recommendation on the following BDC stocks analyzed above (in no particular order): 1) AINV; 2) GAIN; 3) GBDC; 4) TSLX; 5) NEWT; and 6) ORCC.
As of 9/25/2020, I currently have a HOLD recommendation on the following BDC stocks analyzed above (in no particular order): 1) OCSL; 2) FSK; 3) PSEC; 4) TCPC; and 5) OCSI.
As of 9/25/2020, I currently have a STRONG SELL recommendation on the following BDC stock analyzed above (in no particular order): 1) MAIN.
Regarding MAIN, while I certainly “acknowledge” this is one of the better run BDCs since 2013 (the year I began covering MAIN here on Seeking Alpha), I also believe MAIN’s NOTABLE premium to estimated CURRENT NAV makes it an “unappealing” stock to either initiate or add to one’s existing position at or near current levels. This especially holds true since MAIN has recently SUSPENDED/SKIPPED its semi-annual special periodic dividend. Declaring that type of dividend since 2013 was one of the reasons I believed MAIN continued to deserve to trade at the company’s historical, notable premium to peers. While this particular dividend is NOT declared, I believe MAIN’s premium valuation should be a bit “narrower” when compared to its BDC peers.
As a remainder/highlight, The REIT Forum subscribers get weekly sector updates and recommendation change notes (via an article on Sunday with visual tables containing my/our BUY, SELL, or HOLD per share ranges).
Each investor’s BUY, SELL, or HOLD decision is based on one’s risk tolerance, time horizon, and dividend income goals. My personal recommendation will not fit each reader’s current investing strategy. The factual information provided within this article is intended to help assist readers when it comes to investing strategies/decisions.
Current/Recent BDC Sector Stock Disclosures:
On 10/12/2018, I initiated a position in ARCC at a weighted average purchase price of $16.40 per share. On 12/10/2018, 12/18/2018, 12/21/2018, and 4/8/2020, I increased my position in ARCC at a weighted average purchase price of $16.195, $15.305, $14.924, and $11.345 per share, respectively. When combined, my ARCC position has a weighted average purchase price of $13.256 per share. This weighted average per share price excludes all dividends received/reinvested.
On 9/6/2017, I re-entered a position in PSEC at a weighted average purchase price of $6.765 per share. On 10/16/2017 and 11/6/2017, I increased my position in PSEC at a weighted average purchase price of $6.285 and $5.66 per share, respectively. When combined, my PSEC position had a weighted average purchase price of $6.077 per share. This weighted average per share price excluded all dividends received/reinvested. On 6/8/2020, I sold my entire PSEC position at a weighted average sales price of $5.761 per share as my price target, at the time, of $5.75 per share was surpassed. This calculates to a weighted average realized loss and total return of (5.2%) and 26.1%, respectively. I held this weighted average position for approximately 31 months. This calculates to an annualized total return of 10.2%.
On 6/5/2018, I initiated a position in TSLX at a weighted average purchase price of $18.502 per share. On 6/14/2018, I increased my position in TSLX at a weighted average purchase price of $17.855 per share. My second purchase was approximately double the monetary amount of my initial purchase. When combined, my TSLX position had a weighted average purchase price of $18.071 per share. This weighted average per share price excluded all dividends received/reinvested. On 11/12/2019, I sold my entire TSLX position at a weighted average sales price of $21.875 per share. This calculates to a weighted average realized gain and total return of 21.1% and 35.7%, respectively. I held this weighted average position for approximately 17 months.
On 4/17/2020, I re-entered a position in TSLX at a weighted average purchase price of $15.43 per share. On 6/5/2020, I sold my entire TSLX position at a weighted average sales price of $19.385 per share as my price target, at the time, of $19.30 per share was surpassed. This calculates to a weighted average realized gain and total return of 25.6%. I held this position for approximately 1.5 months.
On 10/12/2018, I initiated a position in SLRC at a weighted average purchase price of $20.655 per share. On 12/18/2018, 2/24/2020 and 7/9/2020, I increased my position in SLRC at a weighted average purchase price of $19.66, $19.498, and $15.355 per share, respectively. When combined, my SLRC position has a weighted average purchase price of $17.79 per share. This weighted average per share price excludes all dividends received/reinvested.
On 3/13/2019, I initiated a position in GAIN at a weighted average purchase price of $11.625 per share. On 6/6/2019, I increased my position in GAIN at a weighted average purchase price of $11.085 per share. When combined, my GAIN position had a weighted average purchase price of $11.257 per share. This weighted average per share price excluded all dividends received/reinvested. On 11/11/2019, I sold my entire GAIN position at a weighted average sales price of $13.78 per share. This calculates to a weighted average realized gain and total return of 22.4% and 28.3%, respectively. I held this weighted average position for approximately 7 months.
On 10/2/2019, I re-entered a position in NEWT at a weighted average purchase price of $21.635 per share. On 10/7/2019, 2/5/2020, 2/24/2020, 2/27/2020, and 4/8/2020, I increased my position in NEWT at a weighted average purchase price of $20.95, $21.125, $20.615, $18.565, and $12.475 per share, respectively. When combined, my NEWT position has a weighted average purchase price of $16.096 per share. This weighted average per share price excludes all dividends received/reinvested.
On 4/16/2020 and 4/17/2020, I re-entered a position in GAIN’s Series D (GAINM) and Series E (GAINL) preferred stock at a weighted average purchase price of $23.05 and $22.68 per share, respectively. On 6/9/2020-6/12/2020, I increased my position in GAINL at a weighted average purchase price of $24.194 per share. When combined, my GAINL position has a weighted average purchase price of $23.688 per share. These weighted average per share prices exclude all dividends received/reinvested.
Final Note: All trades/investments I have performed over the past several years have been disclosed to readers in “real time” (that day at the latest) via either the StockTalks feature of Seeking Alpha or, more recently, the “live chat” feature of the Marketplace Service the REIT Forum (which cannot be changed/altered). Through these resources, readers can look up all my prior disclosures (buys/sells) regarding all companies I cover here at Seeking Alpha (see my profile page for a list of all stocks covered). Through StockTalk disclosures and/or the live chat feature of the REIT Forum, at the end of August 2020 I had an unrealized/realized gain “success rate” of 85.5% and a total return (includes dividends received) success rate of 92.7% out of 55 total past and present positions (updated monthly; multiple purchases/sales in one stock count as one overall position until fully closed out). I have only 1 realized “total loss” in any of my past/sold positions. Both percentages experienced a modest increase, when compared to April-May 2020, as a direct result of the recent partial market rally to counter previous fears/panic surrounding the COVID-19 pandemic. In addition, in early April 2020, I initiated several new positions and increased several existing positions at attractive-very attractive prices. I encourage other Seeking Alpha contributors to provide real time buy and sell updates for their readers which would ultimately lead to greater transparency/credibility. Starting in January 2020, I have transitioned all my real-time purchase and sale disclosures solely to members of the REIT Forum. All applicable public articles will still have my sector purchase and sale disclosures (just not in real time). Please disregard any minor “cosmetic” typos if/when applicable.
I am currently “teaming up” with Colorado Wealth Management to provide intra-quarter CURRENT BV and NAV per share projections on all 21 mREIT and 15 BDC stocks I currently cover. These very informative (and “premium”) projections are provided through Colorado’s S.A. Marketplace service. In addition, this includes additional data/analytics, weekly sector recommendations (including ranges), and exclusive “rapid fire” mREIT and BDC articles after earnings. For a full list of benefits I provide to the REIT Forum subscribers, please see my profile page.
Disclosure: I am/we are long ARCC, GAINL, GAINM, NEWT, SLRC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I currently have no position in AINV, BDCS, BIZD, BLK, FSK, GAIN, GBDC, MAIN, OCSI, OCSL, ORCC, PFLT, PSEC, TCPC, or TSLX.
Colorado Wealth Management currently is long SLRC.