BlackRock TCP Capital Corp: Is This 16% Yielder a Bargain?
An Overlooked Stock With a Huge Payout
Despite concerns about the second wave of COVID-19, the recovery in the U.S. stock market has been nothing short of impressive. Over the past three months, both the Dow Jones Industrial Average and the S&P 500 climbed more than 15%, while the Nasdaq Composite surged a whopping 31%.
And that means blue-chip dividend stocks are, once again, highly sought after. In fact, many well-known dividend stocks are trading near their all-time highs. That means their yields are, just like before, subdued. To give you an idea, the average dividend yield of all S&P 500 companies stands at just under 1.9% at the time of this writing. (Source: “S&P 500 Dividend Yield,” multpl.com, last accessed July 9, 2020.)
But for those who are willing to look beyond the blue-chip names, it’s still possible to find companies with much bigger payouts. BlackRock TCP Capital Corp (NASDAQ:TCPC), for instance, is a double-digit yielder most people have never heard of.
Headquartered in Santa Monica, California, TCPC is a business development company (BDC) that provides financing solutions to middle-market companies and small businesses. While the company aims to seek both current income and capital appreciation, it is primarily in the lending business. As of March 31, 2020, 93% of TCPC’s portfolio was invested in senior secured debt. (Source: “BlackRock TCP Capital Corp. Investor Presentation May 2020,” BlackRock TCP Capital Corp, last accessed July 9, 2020.)
Due to tighter banking regulations put in place after the last financial crisis, traditional banks don’t always lend to smaller businesses anymore. As a result, these companies often have to pay higher costs to obtain financing. And that has brought a very lucrative business to middle-market lenders like BlackRock TCP Capital.
At the end of March 2020, the weighted average effective yield on TCPC’s debt portfolio was 10.3% and the weighted average effective yield on its total portfolio was 9.8%.
Note that, as a BDC, BlackRock TCP Capital is regulated under the Investment Company Act of 1940. And that means, as long as the company distributes at least 90% of its profit to shareholders in the form of dividends, it pays little to no income tax at the corporate level.
Combining a lucrative lending business with a tax pass-through structure, TCPC stock has become one of the highest-yielding names in the entire market. Right now, the company has a quarterly dividend rate of $0.36 per share, which comes out to an annual yield of 16.1%.
In today’s market, ultra-high yielders don’t usually have the best track record when it comes to dividend coverage. But from the financial results that are available so far, BlackRock TCP Capital stock seems to have done a pretty decent job.
In 2019, BlackRock generated net investment income of $1.61 per share. Its dividend payments, on the other hand, totaled $1.44 per share for the year. That resulted in a dividend coverage ratio of 112%, leaving a margin of safety. (Source: “BlackRock TCP Capital Corp. Announces 2019 Financial Results Including Fourth Quarter Net Investment Income Of $0.38 Per Share; 31 Consecutive Quarters Of Dividend Coverage,” BlackRock TCP Capital Corp, February 26, 2020.)
In the first quarter of 2020, the company earned net investment income of $0.38 per share while paying a cash dividend of $0.36 per share. So again, the payout was covered. (Source: “BlackRock TCP Capital Corp. Announces First Quarter 2020 Financial Results Including Net Investment Income of $0.38 Per Share; 32 Consecutive Quarters of Dividend Coverage,” BlackRock TCP Capital Corp, May 11, 2020.)
As a matter of fact, TCPC’s net investment income has covered its regular dividends in all 32 quarters since its inception in 2012. Moreover, the company has never reduced its payout during this period. (Source: “Dividend History,” BlackRock TCP Capital Corp, last accessed July 9, 2020.)
Of course, the COVID-19 pandemic means 2020 could be a very different year for many companies. But again, the results we have so far suggest that TCPC’s portfolio has remained solid. In the first quarter of this year, the company had no new non-accruals. In its entire portfolio, non-accrual loans represented just 0.2% of the portfolio at fair value as of March 31, 2020. (Source: BlackRock TCP Capital Corp, May 11, 2020, op. cit.)
It should also help that the company’s portfolio is well diversified. At the end of March, TCPC had investments in 108 different companies, with the majority of them contributing less than one percent to TCPC’s recurring income. Therefore, if one borrower has a problem making payments, the impact on TCPC’s company-level financials will likely be limited.
“Our investments are spread across a wide variety of range of industries [sic]. And while the impacts of the global pandemic are likely to be pervasive, we have limited direct exposure to sectors that have been most severely affected by the global downturn. Furthermore, our loans to companies in directly impacted industries are supported by strong collateral protections,” said TCPC’s Chairman and Chief Executive Officer Howard Levkowitz in an earnings conference call in May. (Source: “BlackRock TCP Capital Corp (TCPC) CEO Howard Levkowitz on Q1 2020 Results – Earnings Call Transcript,” Seeking Alpha, May 12, 2020.)
Is BlackRock TCP Capital Corp Offering a Discount?
While the company has reported some solid results, market participants did not seem to be very enthusiastic about its shares. Despite the recent stock market recovery, TCPC stock is still down by more than 30% year-to-date and trades at just $8.81 at the time of this writing.
But here’s the thing: according to the company’s latest earnings report, BlackRock TCP Capital Corp had a net asset value of $11.76 per share at the end of March. And that means BlackRock TCP Capital stock is trading at a 25% discount to its last-reported net asset value.
Ultimately, the outlook for many businesses remains uncertain due to the COVID-19 pandemic, so I wouldn’t call TCPC stock a slam dunk. But with a deep discount and a massive payout, this company could be worth a look for yield-seeking investors.