13.2%-Yielding Triplepoint Venture Growth Stock Up 26% YTD but Still Undervalued
July 21, 2023
Why TPVG Stock Is Worth Watching
Inflation has been cooling, but interest rates are still on the rise. Rising interest rates might not be something the average person or business likes to see—after all, rising rates make borrowing more expensive—but rising borrowing costs are what banks live for.
Not all financial institutions are built the same, though. One niche in the financial sector that income investors should pay close attention to right now is business development companies (BDCs). In particular, they should look at TriplePoint Venture Growth BDC Corp (NYSE:TPVG).
What are BDCs?
These companies operate much like traditional financial institutions, but they focus on lending capital to small and midsized businesses. That’s why we at Income Investors have nicknamed them “alternative banks.” And thanks to a quirk in tax law, these firms pay out some of the highest dividend yields around.
Back in 1980, the U.S. economy was knee-deep in its worst recession since World War II. One in 10 Americans couldn’t find a job. The Dow Jones Industrial Average was trading at the same level it was at a decade earlier. And the average interest rate for a 30-year fixed mortgage, which had doubled in the span of two years, was 16.4%. (Source: “30-Year Fixed Rate Mortgage Average in the United States,” Federal Reserve Bank of St. Louis, last accessed July 20, 2023.)
Then-President Jimmy Carter saw part of the problem.
Small and midsized businesses are the engine of American enterprise. Companies with 500 people or fewer employ over half of the American workforce. They also spark many of the innovative ideas needed to grow the economy. But sky-high interest rates had cut off these entrepreneurs from the funds they needed to expand their businesses. Without access to capital, many couldn’t invest in new properties, plants, or equipment.
So, the administration came up with a solution. On October 21, 1980, Carter signed the Small Business Investment Incentive Act of 1980. The law allowed for the creation of a unique type of financial institution: BDCs. (Source: “H.R.7554 – An Act to Amend the Federal Securities Laws to Provide Incentives for Small Business Investment, and for Other Purposes.” Congress.gov, last accessed July 20, 2023.)
Overnight, the government created an industry of lending venture capital to small and midsized businesses. Since then, BDCs like TriplePoint Venture Growth BDC Corp have become indispensable.
As mentioned above, BDCs operate in much the same way as traditional financial institutions. By that, I mean they borrow money at low interest rates and lend out that money at higher interest rates. Their profit, called the spread, comes from the difference between what they pay to their creditors and what they receive from their clients.
When I say BDCs target small and medium-sized businesses, that doesn’t mean mom-and-pop shops. BDCs typically lend to companies that generate between $20.0 and $100.0 million yearly in sales.
In recent years, dozens of BDCs have popped up to serve different types of clients. For instance, a Texas-based BDC might focus on lending capital to oil and gas companies. A California-based BDC might devote itself entirely to Silicon Valley start-ups.
What are the advantages of BDCs for investors?
Traditional financial outfits have to pay the government between $0.25 and $0.35 in taxes on each dollar they make in profit. BDCs, however, pay little or no corporate tax on their earnings. In exchange for this benefit, BDCs must distribute at least 90% of their ordinary taxable income to their shareholders. As a result, these companies pay out some of the biggest dividend yields around.
About Triplepoint Venture Growth BDC Corp
Everyone knows you can make a fortune by investing in the right Silicon Valley company. The amount, of course, depends on when you get involved. Investors and venture capitalists like Bill Gates, Peter Thiel, and Neil Shen don’t wait until companies go public. They get in on tech stocks before they launch their initial public offering (IPO).
Similarly, California-based BDCs provide tech start-ups with the financing they need to grow their businesses. In return, the BDCs receive ownership stakes in the start-ups long before their stocks debut on Wall Street.
That’s what makes TriplePoint Venture Growth stock such a compelling opportunity. TriplePoint Venture Growth BDC Corp specializes in companies at the venture-growth stage. The Menlo Park, California-based company primarily focuses on companies in technology, life sciences, and other high-growth industries.
The BDC’s sponsor, TriplePoint Capital, has made more than $10.0 billion in commitments to more than 1,000 venture-capital-backed businesses around the world. Of those commitments, TriplePoint Venture Growth represents more than $1.0 billion. (Source: “Home Page,” TriplePoint Venture Growth BDC Corp, last accessed July 20, 2023.)
If you can judge a BDC by the companies it invests in (and you should, really), it’s tough to beat TriplePoint Venture Growth Corp. It was an early investor in some of the tech industry’s biggest names, including Etsy Inc, Facebook, Inc, Shazam Entertainment Ltd, Square Inc, and YouTube.
As of March 31, TriplePoint Venture Growth BDC held debt investments in 59 companies, warrants in 107 companies, and equity investments in 48 companies. The total cost and fair value of these investments were $1.0 billion and $982.8 million, respectively. (Source: “TriplePoint Venture Growth BDC Corp. Announces First Quarter 2023 Financial Results,” TriplePoint Venture Growth BDC Corp, May 3, 2023.)
Demand for Debt Financing Remained High in Q1
For the first quarter ended March 31, TriplePoint Venture Growth reported total investment and “other” income of $33.6 million, representing a weighted average annualized portfolio yield of 14.7%. That’s compared to $27.3 million and 15.5% for the first quarter of 2022. The return on average equity for the first quarter was 17.8%. (Source: Ibid.)
TriplePoint Venture Growth BDC Corp reported net investment income of $18.6 million, or $0.53 per share, compared to $13.5 million, or $0.44 per share, in the first quarter of 2022.
During the first quarter of 2023, the BDC entered into $3.7 million of new debt commitments with one company, funded debt investments totaling $57.6 million to 11 companies, acquired warrants valued at $100,000 in three companies, and made direct equity investments of $100,000 in one company.
Also during the quarter, TriplePoint Venture Growth received $3.4 million of early repayments and $16.6 million of scheduled principal amortization.
Commenting on the results, Jim Labe, TriplePoint Venture Growth BDC Corp’s chairman and CEO, said, “Despite the volatile market conditions and developments related to the venture banking ecosystem during the first quarter, the demand for our debt financing remains strong.” (Source: Ibid.)
He continued, “We maintained our select approach of working with high quality venture growth companies backed by our select VC partners to generate a strong return on equity and deliver [net interest income] that once again exceeded our distribution.”
Management Raised Quarterly Dividend by 8% & Paid Special Dividend
High net investment income allows TriplePoint Venture Growth to reward its shareholders with a very generous dividend policy. Since its IPO, TriplePoint has declared a total distribution of $13.85 per share.
The company last raised its quarterly dividend in the first quarter—by eight percent from $0.37 to $0.40. In May, the BDC again declared a second-quarter distribution of $0.40 per share, for a current yield of 13.2%. (Source: “Dividends,” TriplePoint Venture Growth BDC Corp, last accessed July 20, 2023.)
Last December, the company paid a special dividend of $0.10 per share. This payment was part of the company’s estimated undistributed taxable earnings from net investment income. TriplePoint Venture Growth BDC Corp’s anticipated remaining undistributed taxable earnings from net investment income—$18.5 million, or $0.52 per share, as of September 30, 2022—will spill over into 2023.
What’s better than rising high-yield dividends? A soaring share price. As of this writing, TPVG stock is up by:
- 6.7% over the last three months
- 26.7% year-to-date
- 9.2% year-over-year
Chart courtesy of StockCharts.com
The Lowdown on TriplePoint Venture Growth Stock
TriplePoint Venture Growth BDC Corp is a leading BDC devoted to venture-growth-stage companies in technology and other high-growth industries. With a solid balance sheet and an enviable portfolio of clients, its objective is to target returns of 10% to 18% on debt investments from interest and fees.
Over the past few years, TriplePoint Venture Growth has positioned itself at the forefront of emerging industries, from digital marketing and biofuel to social media and health care. In addition to getting investors on the inside track of the next generation of tech IPOs, TPVG stock pays reliable, high-yield dividends.
