Golub Capital BDC Inc: This 7.3% Yield Looks Solid
A High-Yield Stock You Likely Haven’t Considered
Most people have never heard of Golub Capital BDC Inc (NASDAQ:GBDC), but the company stands as one of the best high-yield opportunities on the market.
As the name suggests, Golub Capital BDC is a business development company (BDC). Headquartered in New York City, Golub provides financing solutions to U.S. middle-market companies and their private equity sponsors. And since GBDC focuses primarily on making debt investments, it can earn a predictable stream of interest income from its portfolio.
The business is quite lucrative. In the second quarter of its fiscal-year 2019, which ended March 31, Golub Capital made new investments with a weighted average interest rate of 8.7%. Looking back, we see that the company has been making debt investments that yield high single-digits for quite some time. (Source: “Golub Capital BDC, Inc. Investor Presentation Quarter Ended March 31, 2019,” Golub Capital BDC Inc, last accessed June 27, 2019.)
Now, in a low-yield environment, loans with this kind of interest rate don’t really look particularly safe. But things have been going quite well for this BDC. The last time I checked, non-accrual investments accounted for just 0.5% of the company’s total debt investment at cost.
For those not in the know, a non-accrual debt investment is one that is not generating its stated interest due to nonpayment from the borrower. Having a low non-accrual rate indicates that, despite Golub Capital’s focus on high-yield debt investments, the credit quality of its portfolio remains solid.
In fact, according to the company’s own credit rating system, more than 90% of its investments had an internal performance rating of four or higher. In Golub Capital’s own words, when a loan has an internal performance rating of four, it means the borrower “is generally performing as expected and the risk factors are neutral to favorable.” (Source: Ibid.)
The company’s portfolio is well diversified, too. By the end of March, Golub Capital BDC had a $1.9-billion portfolio diversified across 211 investments. That means the average size of its investments is just $8.9 million. This also means, if one investment is not producing its expected return, the impact on GBDC’s company-level financials will be limited.
So, what can you expect from a BDC with a portfolio of high-yield-performing debt investments? Well, given that BDCs are required by law to distribute most of their profits to shareholders, I expect to see a generous dividend policy.
As it turns out, that’s exactly what Golub Capital provides.
Golub Capital BDC Inc Pays Oversized Dividends
Right now, Golub has a quarterly dividend rate of $0.32 per share. With GBDC stock trading at $17.65 apiece, that translates to an annual yield of 7.2%.
Of course, as I mentioned earlier, we live in a low-yield environment at the moment. And a 7.3% yield may look risky, given what most other stocks are paying.
Still, if you take a look at the company’s latest financial results, you’ll see that Golub does have what it takes to back its generous dividend policy.
In the second quarter of GBDC’s fiscal-year 2019, the company earned a net investment income of $20.1 million, or $0.33 per share. During the quarter, Golub Capital declared and paid total cash distributions of $19.3 million, or $0.32 per share. (Source: “Golub Capital BDC, Inc. Declares Fiscal Year 2019 Third Quarter Distribution Of $0.32 Per Share And Announces Fiscal Year 2019 Second Quarter Financial Results,” Golub Capital BDC Inc, May 8, 2019.)
In other words, the company’s profits covered its payout.
Mind you, regular dividends aren’t the only payments that GBDC stock investors have been collecting. The company also pays special dividends.
On November 27, 2018, Golub Capital’s board of directors declared a special cash distribution of $0.12 per share, an amount that was on top of its regular quarterly payments. That special dividend was paid on December 28. (Source: “Golub Capital BDC, Inc. Declares Fiscal Year 2019 First Quarter Distribution Of $0.32 Per Share, A Special Distribution Of $0.12 Per Share And Announces Fiscal Year 2018 Fourth Quarter Financial Results,” Golub Capital BDC Inc, November 28, 2018.)
That was not the first time for Golub Capital stock to reward shareholders with a bonus check. In fact, since the company’s initial public offering (IPO) in 2010, it has made three special dividend payments to investors. (Source: “Stock Information,” Golub Capital BDC Corp, last accessed June 27, 2019.)
What’s Next for This High Yield Stock?
The best could be yet to come for Golub Capital BDC Inc. Last November, the company announced a merger agreement with Golub Capital Investment Corporation. Based on management’s latest projection, the transaction should increase Golub Capital BDC’s net asset value per share by 4.5%. Meanwhile, the board of directors plans to raise the company’s quarterly dividend rate to $0.33 per share after the merger.
Therefore, if things go as planned, this 7.3% yielder could be paying even more in the not-so-distant future.