Golub Capital: 10% Yield, 123% Dividend Coverage Make It A Buy

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Golub Capital: 10% Yield, 123% Dividend Coverage Make It A Buy

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Golub Capital offers a high, well-covered 10.3% dividend yield, supported by a strong balance sheet and low non-accrual rate.GBDC's diversified portfolio of first-lien loans across defensive sectors ...

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It carries a sizable investment portfolio with a $7.9 billion fair value. Most of the portfolio is comprised of first-lien loans, representing 93% of the portfolio total. As shown below, the remainder is comprised mostly of equity investments, representing 7% of total portfolio value. Investor Presentation GBDC is well-diversified across 380 portfolio companies, with an average hold size of just 0.3% and the top 10 companies comprise just 14% of the portfolio total, thereby mitigating any outsized impact from any one borrower default. GBDC also invests in a mix of growth and defensive sectors. As shown below, about a quarter of the portfolio is invested in software, and healthcare, specialty retail, insurance, and consumer services round out the remaining top 5 segments, making up half of the portfolio. Investor Presentation Like other BDCs, GBDC","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"GBDC":"Golub Capital BDC","BK4135":"资产管理与托管银行"},"translate_title":"Golub Capital：10%的收益率、123%的股息覆盖率值得买入","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"GBDC":0.9},"content_text":"Golub Capital offers a high, well-covered 10.3% dividend yield, supported by a strong balance sheet and low non-accrual rate.GBDC's diversified portfolio of first-lien loans across defensive sectors like software and healthcare mitigates risk and enhances stability.The current high interest rate environment benefits GBDC, resulting in a weighted average yield on income-producing assets to 12.3%.Trading at a slight discount to NAV with the potential for special dividends, GBDC is a compelling choice for income-focused investors in a pricey market.Sashkinw High yield investing can be thought of as being a high-risk endeavor. However, after having many, many reader comments here on Seeking Alpha, I've come to realize that, with some exceptions, high income investors are actually some of the most risk-averse people on the planet. That's because, unlike growth investors, dividend investors care about getting a cash return for putting their capital at risk. Higher dividend yields that are sustainable result in a faster payback period, to the point where some investors of well-run REITs, BDCs, MLPs, and even C Corporations have now gotten their entire initial investment back on certain stocks, which means that they are now essentially playing with 'house money'. This brings me to Golub Capital (NASDAQ:GBDC), which I believe fits the mold of a well-run BDC that's delivered strong returns for shareholders through high dividends and steady portfolio performance. I last covered GBDC in July, highlighting its diversification, strong operating fundamentals, high dividend coverage, and undervaluation. It appears that the market has yet to agree, as the stock has declined by 2.3% since my last piece (1% total return including dividends). As shown below, GBDC currently sits far below its 52-week high of $17.72 achieved in April this year. Seeking Alpha In this article, I revisit GBDC including recent business performance, and discuss what makes it a high yielding bargain in this frothy market, so let's get started! Why GBDC? Golub Capital is an externally managed BDC that provides loans to U.S. middle-market companies. It carries a sizable investment portfolio with a $7.9 billion fair value. Most of the portfolio is comprised of first-lien loans, representing 93% of the portfolio total. As shown below, the remainder is comprised mostly of equity investments, representing 7% of total portfolio value. Investor Presentation GBDC is well-diversified across 380 portfolio companies, with an average hold size of just 0.3% and the top 10 companies comprise just 14% of the portfolio total, thereby mitigating any outsized impact from any one borrower default. GBDC also invests in a mix of growth and defensive sectors. As shown below, about a quarter of the portfolio is invested in software, and healthcare, specialty retail, insurance, and consumer services round out the remaining top 5 segments, making up half of the portfolio. Investor Presentation Like other BDCs, GBDC has benefitted from the current higher interest rate environment, given that its debt investments are 99% floating rate. This has resulted in material growth in GBDC's weighted average yield on income-producing assets. While recent growth has tapered down, the 12.3% achieved in Q2 2024 sits materially above the 9.2% from Q3 2022, as shown below. Investor Presentation Also encouraging, GBDC's NAV per share grew by 1.3% on a sequential QoQ basis to $15.32, driven in part by the accretive effects of the merger with GBDC 3, and achieved an adjusted NII ROE of 12.7% during Q2. GBDC also made robust new investment commitments totaling $435 million during the second quarter, up $111 million from the prior year period on continued strength in middle-market M&A activity, which started to recover late last year. Non-accruals also remain well in check, representing just 1% of portfolio fair value and up just 10 basis points sequentially. This sits well below the 2.5% to 3% level generally considered acceptable for BDCs. GBDC maintains a strong balance sheet with a low debt-to-equity ratio of 1.00x net of available cash and trapped cash for the purpose of paying down principal on outstanding notes. This sits well below the 2.0x regulatory limit for BDCs, giving GBDC dry powder to take advantage of opportunities. Importantly for income investors, GBDC currently supports a 10.3% regular dividend yield that's well-covered by a 123% NII-to-Dividend coverage ratio. This enabled GBDC to pay 5 special dividends so far this year, totaling $0.28 per share. Looking ahead to Q3 results, I believe GBDC has the potential to grow NII given its strong balance sheet and management's plan to re-leverage the balance sheet to target levels since completing the merger with GBDC 3. I would also look for changes in the non-accrual rate and signs of NAV per share growth in GBDC's post-merger lifecycle. Turning to valuation, I continue to see value in GBDC at the current price of $15.15, equating to a 1.1% discount to NAV per share of $15.32. As shown below, GBDC trades about on par with Blue Owl Capital (OBDC) and is noticeably cheaper than Ares Capital (ARCC), which carries a P/NAV of 1.09x. Seeking Alpha With a +10% yield and a slight discount to NAV per share, along with tailwinds from a strong balance sheet, GBDC could reasonably give investors a high and well-covered regular dividend yield with the potential for special dividends along the way. As shown below, analysts have a consensus Buy rating on the stock with an average price target of $16.25, which sits 7.3% above the current price. Seeking Alpha Risks to the thesis include the potential for portfolio losses due to asset markdowns, as was the case for two credits in Q2, Imperial Optical, and Pluralsight, which resulted in the majority of the $0.17 per share in net realized and unrealized loss in Q2. A macroeconomic downturn could exacerbate these risks and place pressure on GBDC's borrowers. In addition, higher interest rates on GBDC's balance sheet debt and increased competition in the BDC space could result in yield compression, which could negate some of the NII benefits from increased leverage. Investor Takeaway Golub Capital presents an attractive opportunity for income-focused investors seeking high yield with manageable risk. It's also well-diversified, with most of its portfolio in first-lien loans and investments across defensive sectors like software and healthcare. It's also operating in a favorable interest rate environment.  Lastly, GBDC carries a solid balance sheet and a low non-accrual rate, and trades at a slight discount to NAV. With a well-covered +10% regular dividend yield plus special dividends. Overall, GBDC provides a compelling mix of high, sustainable yield and growth potential in an overall pricey market.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"hasMoreComments":false,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}