Published: November 11, 2021 at 12:30 pm EST
Apollo Investment (AINV) pays out a dividend of $0.36 per share but just announced IIIQ 2021 Net Investment Income Per Share of $0.33. The BDC is pretty close to being fully leveraged at 1.50: 1.00x and yields are under pressure due to competition and a shift to "safer" first lien deals booked on the broader Apollo platform. What is the advisor to do: cut the distribution or - somehow - boost earnings ? At the moment, the investment advisor is non-committal about its plans, and is paying out an unchanged $0.31 and $0.05 special dividend through the rest of 2021, even though current earnings do not support that level of payout. As made clear on the last conference call, AINV has plans to boost income and reduce costs sufficiently in the quarter or two ahead to be able to "cover" its dividend. If that fails, the advisor also has the ability to temporarily waive or permanently reduce its fees so that no dividend reduction is needed.
Much of what happens next depends on how well AINV handles the disposition of its motley crew of "non core" investment assets in alternative energy; oil & gas exploration and shipping. A resolution of these assets - which have been "non core" for 7 years - has been taking an inordinate amount of time, but favorable market conditions and the need to "cover" the dividend are likely to generate a resolution within months. Moreover, there's a good chance AINV will squeeze more income out of its largest investment - Merx Aviation, which the BDC controls. Finally - and this could prove too optimistic - we get the impression the advisor will waive some portion of its fees if all else fails. After all, shareholders have seen their book value and distributions greatly reduced in recent years, while most of the BDC's brand-name peers have performed much better.
We are projecting that AINV will - one way or another - find a way to maintain that $0.36/$1.44 dividend for 2022 and all the way to 2026. Should that occur - and the market is very divided on the subject - we project the terminal multiple at which the BDC will trade will be 12.00x. That's higher than in the past, because the overhang of the depreciating "non core" assets and the uncertainty about the dividend has been a depressant. If we are right - and this is an unabashedly "bullish" call - AINV should generate both a high level of income (11% yield) and price appreciation (target price of $17.28 versus $13.12 currently). That translates into a 5 year return of 87% or 17.3% per annum. (Compare that to the last 5 years total return of only 31%).
This is a "contrarian call", but the downside seems limited. If we assume AINV cuts its annual distribution to $1.24 from $1.44 ($0.31 per quarter), and we assume only an 11.0x terminal multiple, the target price becomes $13.64. Then the total return is 35%, or 10.2% per annum. Not great, but above the average expected return for equities.
With only 3 BDC stocks (including AINV) promising a greater than 15.0% annual return going forward in our model, there are few outsized opportunities for BDC investors. For anyone interested in going against the grain this is a Best Idea.
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