In this quick post we highlight why we have initiated a position in the Golub BDC (GBDC) – a Business Development Company with a 8.6% dividend yield and strong historic return.
The portfolio is well diversified with over 300 investments – well above the 123 sector average. Its industry focus is in Software, IT and Healthcare which also gives it a less cyclical profile.
Q1 GAAP net income per share fell to $0.254 from $0.263 in the previous quarter with Adjusted net income falling by a similar amount. The drop looks to be in part due to the increase in debt interest cost. As we have discussed before, many BDCs, GBDC included, are in the net income valley – a temporary drop in net income as debt interest costs increase faster than asset-side income due to the rise in Libor up to weighted-average Libor floor. We expect this trend to reverse around Q3 as we discuss further below.
Dividend coverage based on Adjusted net income is running right at 100%. The adjusted figures strip out merger accounting as well as capital gains incentive fees.
NAV increased by 0.6% which is around 1% above the sector average as the chart shows below.
The uplift was due to close to 1% of unrealized and realized gains.
The company is well-positioned to grow its net income over the coming quarters. The following chart shows that net income is expected to rise 21% when Libor reaches the level of 2% (equivalent to 1% in the chart below) relative to income at Libor equal to 1%. With Libor half-way there already, income has already increased substantially and will increase even more as existing loans reset at higher Libor levels. The entire 21% rise will not happen immediately given the usual reset and accrual lags and will be offset somewhat by spread compression but a significant chunk should feed through.
The company targets a dividend of about an 8% annual rate of its NAV which works out to a level of $0.307 versus its $0.30 current dividend. Unless credit spreads continue to rise, pulling the NAV lower, we wouldn’t be surprised by another dividend hike over the next several quarters.
GBDC remains an attractive option for more defensive BDC investors due to its lower fee structure, lower equity allocation, strong portfolio quality and an attractive valuation. Its NAV should be better protected relative to the sector in the current sell-off given its relatively low equity exposure and first-lien focus. A sub-sector valuation offers an attractive entry point.
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