4 High-Yield BDCs to Buy Before Earnings Are Reported

April 30, 2015 by 247lee

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Even though yields have continued to stay low, many high-yield investors that also look for growth have been disappointed in the performance of various high-yield investment vehicles. In a new report, JPMorgan sees the market for the top high-yield business development companies (BDCs) remaining smooth, as first-quarter results should be solid.

The JPMorgan team points out that the BDCs with energy loan exposure probably had a better quarter, as the price of crude oil has firmed and hit the highest close Wednesday in some time. The analysts continue to favor the BDCs with higher liquidity, as they are best positioned to take advantage of new investment opportunities.

Here are the four that are rated Overweight at JPMorgan and pay high dividends: Ares Capital Corp. (NASDAQ: ARCC), Fifth Street Finance Corp. (NASDAQ: FSC), PennantPark Investment Corp. (NASDAQ: PNNT) and Solar Capital Ltd. (NASDAQ: SLRC).

Ares Capital

This leading specialty finance company provides one-stop debt and equity financing solutions to U.S. middle market companies, venture capital backed businesses and power generation projects. Ares Capital originates and invests in senior secured loans, mezzanine debt and, to a lesser extent, equity investments through its national direct origination platform. Ares Capital’s investment objective is to generate both current income and capital appreciation through debt and equity investments, primarily in private companies.

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The JPMorgan team believe the strength of company’s origination platform, sizable balance sheet and ample liquidity position it favorably in a very competitive investing environment. They also believe that with the current tight spread environment, Ares Capital has the scale and industry relationships to continue to make competitive, high-credit-quality investments. That is very solid for shareholders.

Ares shareholders are paid a very competitive 9.8% dividend. The JPMorgan price target for the stock is $18. The Thomson/First Call consensus price target is at $18.27. Shares closed Wednesday at $17.15. The company will report earnings on May 4.

Fifth Street Finance

This growing credit-focused asset manager has over $6 billion of assets under management across two publicly traded business development companies. The Fifth Street platform provides innovative and customized financing solutions to small and midsized businesses across the capital structure through complementary investment vehicles and co-investment capabilities. With a 17-year track record focused on disciplined credit investing across multiple economic cycles, Fifth Street is led by a seasoned management team that has issued billions of dollars in public equity, private capital and public debt securities

The JPMorgan team is encouraged by the new management lowering the dividend and focusing on a more conservative portfolio. They also like the efforts to lower leverage employed by the company and feel it will make future investment easier.

Fifth Street investors are paid a 10.11% dividend. The JPMorgan price target is $8 and consensus target is $8.14. Shares closed Wednesday at $7.11. The company will report on May 11.

PennantPark Investment

This BDC principally invests in U.S. middle-market private companies in the form of senior secured loans, mezzanine debt and equity investments. From time to time, PennantPark may also invest in public companies with securities that are thinly traded. The company has seen some solid insider buying this year, which is a positive for shareholders.

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The analysts cite the fact that the company is conservatively managed with a seven-year history of consistent dividends and a strong credit history. Based on the JPMorgan outlook for portfolio growth and capital deployment, the analysts appear confident the dividend remains relatively secure.

PennantPark investors are paid a very nice 11.7% dividend. The JPMorgan price target is $10.50, and consensus target is set at $10.54. The stock closed Wednesday at $9.52. The company reports on May 6.

Solar Capital

This company specializes in investments in leveraged middle market companies, fund primarily in United States. The fund’s investments generally range between $20 million and $100 million. It invests in the form of senior secured loans, mezzanine loans and equity securities. It may also seek investments in thinly traded public companies and also make secondary investments. Solar Capital makes non-control equity investments.

Recently the chief executive and the chief financial officer purchased stock. The two teamed up to purchase a total of 91,278 shares of the company at prices that ranged from $20.20 to $20.30. The total for the buy came to $2.1 million.

The analysts highlight that the company has built a high-quality portfolio since going public in 2009. They also like that it is very conservatively managed and the underlying portfolio has shown strong credit performance. The company has a joint venture arrangement with Pimco, and the analysts expect origination activity to increase, as Solar Capital will be competitive on larger deals.

Solar Capital investors are paid a more conservative 8.03% dividend. The JPMorgan price target is $22.50, and the consensus estimate $22.42. Shares closed Wednesday at $19.86. The company reports on May 5.

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While the price targets are not sky-high, combined with the strong dividends, the total return possibilities for these companies look to be very solid.