Once again interest rates continue to sink as investors from around the world buy U.S. Treasury securities at some of the lowest rates in the history of our debt. The problem for many is finding higher yields without taking an inordinate amount of risk. Naturally the higher the yield, the higher the risk level, but with some of the highest-yielding securities taking a drubbing over the last year, the chances that some could rally are much better now.
A new Jefferies research report takes a look at the top business development companies (BDCs). These companies typically invest in and help small and medium-size companies grow in the initial stages of their development by providing capital. Because they are regulated investment companies, they must distribute over 90% of their profits to shareholders, which results in above-average dividend yields.
Jefferies is very positive on three companies, two of which the team recommends investors buy shares in before the second-quarter earnings are released. All three are rated Buy at Jefferies.
This is a top high-yielding BDC to buy. Ares Capital Corp. (NASDAQ: ARCC) is a leading specialty finance company that 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. Its investment objective is to generate both current income and capital appreciation through debt and equity investments primarily in private companies.
Jefferies believes the strength of company’s origination platform, sizable balance sheet and ample liquidity position the company favorably in a very competitive investing environment. Other Wall Street analysts also believe that with current tight spread environment, Ares Capital has the scale and industry relationships to continue to make competitive, high-credit-quality investments.
Ares has a diversified portfolio totaling $9.1 billion at fair value. It consists of investments in 218 portfolio companies. Jefferies believes the company’s recent acquisition of American Capital is a huge positive and suggests buying shares into the print.
Ares shareholders receive a very rich 10.35% dividend. The Jefferies price target for the stock is $17.50. The Wall Street consensus target is $16.67. Shares closed Tuesday at $14.68.
This is another top BDC that Jefferies analysts feel investors should consider buying before it reports earnings. Hercules Capital Inc. (NYSE: HTGC) is a BDC specializing in providing venture debt, debt, senior secured loans and growth capital to privately held venture capital-backed companies at all stages of development, including select publicly listed companies and select special opportunity lower middle market companies that require additional capital to fund acquisitions, recapitalizations and refinancings and established-stage companies.
The firm provides growth capital financing solutions for capital extension; management buyout and corporate spin-out financing solutions; company, asset specific or intellectual property acquisition; convertible, subordinated or mezzanine loans; domestic and international expansion; vendor financing; revenue acceleration by sales; and marketing development and manufacturing expansion. It provides asset-based financing with a focus on cash flow; accounts receivable facilities; equipment loans/leases; equipment acquisition; facilities build-out or expansion; working capital revolving lines of credit; and inventory.
Hercules Capital invests primarily in structured debt with warrants and, to a lesser extent, in senior debt and equity investments. The firm generally seeks to invest in companies that have been operating for at least six to 12 months prior to the date of their investment. It prefers to invest in technology, energy technology and life sciences.
Investors receive a 9.55% dividend. The $14 Jefferies price target compares to the consensus target of $13.55. The shares closed Tuesday at $13.
This top BDC also makes sense for aggressive investors, but Jefferies didn’t recommend buying this prior to earnings. Triangle Capital Corp. (NASDAQ: TCAP) specializes in private equity and mezzanine investments. It focuses on leveraged buyouts, management buyouts, ESOPs, change of control transactions, acquisition financings, growth financing and recapitalizations in lower middle market, mature and later stage companies. The firm prefers to make investments in many business sectors, including manufacturing, distribution, transportation, energy, communications, health services, restaurants and media. It primarily invests in companies located throughout the United States, with an emphasis on the Southeast and Mid-Atlantic.
While the company cut its payout 17% in May, that bodes well for new shareholders at it is very unlikely its will have another cut anytime soon. In addition, the company is currently earning more in investment income than it is paying out by a large margin.
Shareholders receive an 8.9% distribution. Jefferies has a $20 price target. The consensus target is $20.77, and shares closed Tuesday at $20.25.
Needless to say, these companies are not appropriate for conservative accounts that shun loss of principal. They do make sense for aggressive income or total return accounts looking to add yield and some upside potential.