TCG BDC Inc: 3 Reasons to Consider This 17.3% Yielder
A High-Yield Stock You Likely Haven’t Considered
Even though most people have never heard of TCG BDC Inc (NASDAQ:CGBD), I’m sure you’ll want to learn more about it. That’s because this little-known stock currently offers a jaw-dropping yield of 17.3%.
That’s right; in an era when the average S&P 500 company yields around two percent, CGBD stock is paying investors more than eight times that. (Source: “S&P 500 Dividend Yield,” Multpl.com, last accessed June 30, 2020.)
Of course, if yield is their only criterion, investors would all be rushing toward companies that pay 20%, 25%, or 30%. But they are not. In fact, most income investors—myself included—still prefer blue-chip dividend stocks even though they don’t provide much in terms of yield.
The reality is, most ultra-high yielders are not the safest bets. Think about it: if a company is solid and offers a reliable yield of over 20%, investors would all be buying its shares. As they bid up the stock price, the company’s yield would drop. That’s why blue-chip stocks tend to be low yielders, while high-yield stocks are often considered to be more risky.
Still, before you cross TCG BDC stock off your watch list, here are three reasons why you might want to give it a look.
The first reason to consider CGBD stock is that TCG BDC Inc has a solid business to back its dividend policy.
As its name suggests, TCG BDC is a business development company (BDC). Its investment objective is to generate current income and capital appreciation mainly through debt investments in U.S. middle-market companies. As of March 31, the company had a $2.0-billion portfolio (by fair value). (Source: “TCG BDC Investor Presentation June 2020,” TCG BDC Inc, last accessed 30, 2020.)
The investments are well diversified across 110 different companies. The BDC’s top 10 investments represent just 21% of its total portfolio.
Moreover, TCG BDC’s portfolio has a heavy tilt to first-lien loans. When you are a lender of first lien, you would be the first one waiting in line to get paid in the event of a borrower liquidation. At the end of March, first-lien debt accounted for 73% of the company’s investment portfolio.
Put it all together and the strategy has provided investors with a rather reliable dividend stream so far. In fact, the company’s net investment income has exceeded its regular dividend in every quarter since its initial public offering (IPO).
Looking at the firm’s latest earnings report, we see that TCG BDC generated net investment income of $0.42 per share in the first quarter of 2020. While the amount was one cent lower compared to the December quarter, it still provided more than enough coverage for the regular dividend of $0.37 per share declared for the first quarter. (Source: “TCG BDC, Inc. Announces First Quarter 2020 Financial Results and Declares Second Quarter 2020 Dividend of $0.37 Per Share,” TCG BDC Inc, May 5, 2020.)
The outbreak of COVID-19 has sent shock waves through the economy. Many companies are still struggling. And that brings us to the second reason why TCG BDC stock deserves investors’ attention: the company has taken proactive actions in this challenging environment.
After the first quarter ended, the firm sold more than $150.0 million of assets at attractive prices. The proceeds were used to reduce its outstanding debt. At the same time, the company raised $50.0 million of preferred equity on compelling terms. These actions helped TCG BDC Inc quickly reestablish its target leverage profile.
In a conference call in May, the company’s Chairperson, President, and Chief Executive Officer Linda Pace said that that these actions were not taken “under any form of stress or duress.” (Source: “TCG BDC, Inc. (CGBD) CEO Linda Pace on Q1 2020 Results – Earnings Call Transcript,” Seeking Alpha, May 6, 2020.)
She added, “Rather, we have been moving proactively and aggressively since the onset of the crisis to ensure that CGBD’s balance sheet maintains ample flexibility to maximize value even in the most severe economic scenarios.”
The third reason has to do with TCG BDC Inc’s manager.
You see, this high-yield BDC is externally managed by The Carlyle Group Inc (NASDAQ:CG), a global investment firm with over $200.0 billion in assets under management. (Source: “TCG BDC Investor Presentation June 2020,” TCG BDC Inc, op. cit.)
One common concern for externally managed BDCs is whether the manager will act in the BDC’s best interest. The good news is, at CGBD, the interests of the BDC and the manager are well aligned.
Remember earlier that TCG BDC Inc raised $50.0 million in preferred equity? Well, that investment was made by Carlyle. With that investment, Carlyle—including its employees and founders—have an as-converted ownership stake of approximately 17% in the BDC.
As Pace said, “[We] believe this investment strongly reinforces Carlyle’s alignment with CGBD shareholders.” (Source: Seeking Alpha, op. cit.)
Bottom Line on TCG BDC Inc
Just like its peers, TCG BDC Inc will continue to face uncertainty. But due to the three reasons explained above, it could survive the storm in better shape than most. As it stands, CGBD stock is a name worth watching for income investors.