The more the BDC rally marches on - as covered by the BDC Reporter in the weekly Market Recap article - the smaller the number of outsized BDC investment opportunities. We've been in price recovery mode since the low point in 2022 of June 16, now up 15% using the price of the S&P BDC Index. Another 11% advance and the index will be back at the year's high point on April 20.
Of course, we don't know if a full recovery - or better - is in the cards, or we're reaching the high point of a "bear market bounce". Certainly, this is an unusual rally if sustained - rising prices into an oncoming recession and relatively low trading volumes throughout. You buy your ticket and take your chances. We're looking beyond the next few weeks or months - projecting 5 years out.
Currently, our model indicates the average total return of the 43 BDCs we track should be 14.7% per annum on average, and the average yield is 9.6%. 6 BDCs still promise a superior return of 20% plus per annum, with 19 others in the 15%-20% column. Let's have a look at the former for our Best Idea candidate:
As in prior weeks, CION leads the pack with a 33% projected annual return, but the under-rated BDC has been on an upward path since June 23 when closing at $7.98. Currently CION is 19% higher at $9.50, but is still trading at a (41%) discount to net book value per share and 7.0x projected 2023 EPS. CION was our Best Idea back at the end of the week ended July 15 when the projected return was 41% per annum. Not much has changed since as CION has not yet reported results except a rise in the BDC's price and a drop in its return.
Also on our list is non-dividend paying PFX, which has fallen out of market favor of late, but which also hasn't reported its results. The secretive BDC that used to be Medley Capital before becoming internally managed has a net book value of $62.94. We project the business is worth $45.66, but the stock price is at $36.52. However, this is not a long term play but a short term view with a price upside of 25%. There's been no news of late and this remains a speculative assessment with no obvious catalyst except that huge discount.
Another turnaround prospect is FCRD, a BDC whose stock has been in terminal free fall for years. We're assuming in our projections that the re-positioning of the BDC's portfolio is essentially completed and management will be able to maintain itys current annual dividend of $0.40 till 2026. We're also assuming that in the long run - with that sort of dividend stability - the BDC will trade at a 12.5x terminal multiple - a price of $4.00 vs $3.29 currently. However, we'd like to wait till the IIQ 2022 results come in before committing ourselves. The projected annual return is a juicy 23%, though, if we're right.
There are two venture-debt BDCs offering 20% annual returns. TPVG is performing well; posted good IIQ 2022 results and raised new equity, which dropped its stock price and increases the potential LT gain. TRIN has also reported good results and boosted its distribution for the nth time. The market does not yet trust the long term outlook - the 2023 Price To Earnings is just 7.7x, hence the high return if TRIN really pays a dividend of $1.88 down the road. However, TRIN is new to the public market and to us and we're not sure that our outlook is correct given the BDC's very rapid growth. We're putting TRIN to one side for now.
Our Best Idea is a more middle of the road choice: Capital Southwest or CSWC. The mostly lower middle market focused BDC offers a 103% 5 year return (20.6% per annum) that assumes distributions will be just $2.04 in year 5. That's not much of a stretch for a BDC that just announced EPS equal to $1.96 annualized and still has some SBIC growth to look forward to. The current distribution is level is $0.50q/$2.00 annual. We're not throwing in any distributions from realized gains, but those have been a frequent feature in recent years and are likely to pop up again.
Our valuation, though, assumes a terminal multiple of 15.0x. In our mind - and those of many investors - CSWC is a mini-Main Street Capital (MAIN), whose multiple is even higher. At times, the market gets excited and offers up a high multiple. CSWC has traded to $28.41 in the past 52 weeks, implying a 14.5x on the most recent EPS annualized. Even at a more conventional end multiple of 12.5x, CSWC would still earn 15.5% per annum in our model.
We've been impressed with CSWC ever since they became a full fledged lender-investor BDC. Over the past 5 years Seeking Alpha gives their total return as 138%. To project a 103% over the next 5 years, including an immediate yield on the current price of $20.15 - closer to its 52 week low than its high - seems like a pretty safe bet. The immediate yield, with the recent dividend increase, is just shy of 10%. Thanks to higher rates and AUM growth, the 2023 projection - right round the corner with 3 quarters of 2022 already accounted for - is for a dividend of $2.20 and a yield of 10.9%.