FDUS – A 10.65% Yielding BDC Keeps Delivering

The recent dislocation in income markets is pushing many investors to batten the hatches and plug holes in their portfolios. The Fidus Investment Corp (FDUS), a Business Development Company that we have held in our High Income Portfolio since Q4 continues to swim against the current with a double-digit gain so far this year.

FDUS runs a $720m investment portfolio which puts it not far from the middle-of-the-pack in the broader BDC sector. The company plays in the lower-middle market space, targeting companies with EBITDA of $5-$30 million. Its top sectors include Tech, Business Services and Aerospace / Defense. 

FDUS recently released their earnings and they were stellar. The company continues to outperform the broader sector with a sharp rise in the NAV and a dividend increase of 29%.

Despite this stellar performance the company continues to run an underinvested portfolio, leaving it significant room to drive higher income levels.

Non-accruals remain at zero on a fair-value basis.

The company has put up very impressive total NAV returns over the last 3 and 5 years – only behind two other BDCs in our coverage over these periods. Despite this fact, it continues to trade at a fairly middling valuation of around 100% or 8% below the average and 1% below the median valuation.

FDUS is well positioned to grow its income over the coming quarters. It has maintained a low level of non-accruals, its leverage is very low and expected to grow, its equity allocations are likely to be recycled into additional income-generating assets, its debt cost has continued to fall and its income will get a strong uplift from the expected Fed hiking trajectory. We also expect the company’s valuation to move higher in response to the new dividend policy of paying 100% of the gap between Adjusted NII and the regular dividend. 

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