August 16, 2023
The last time we updated Barings BDC (BBDC), the stock price was at a relatively low level and had recently fallen to $8.10 (see below for prior periods). However, with our long-term perspective - and following a thorough review of the BDC - we remained sanguine about BBDC's outlook. Now, 6 months later - and after another in-depth review of BBDC's latest results (including leaning on the BDC Credit Reporter's most current assessment), we're making a change in the Expected Return model.
Starting in 2024, we've increased the expected annual distribution to $1.1000 per share, going through to 2027. Previously, we were projecting the distribution would be $1.0200 from 2023 through 2027. The dividend multiple we use to set a Target Price remains at 12.50x. Furthermore - and a new metric to take into consideration - we're projecting that BBDC's NAV Per Share will remain unchanged between the end of 2022 and the end of 2027.
Up When Down
Admittedly, a 7% increase in the annual distribution might not seem like much, but given that everyone expects interest rates to drop from 2024, this projection is relatively aggressive. We have a host of reasons, though, why we believe BBDC can reach the stated level and - more importantly - stay there.
To date, BBDC's 2023's earnings and dividend performance have been encouraging. The former is highly volatile as adjustments to the incentive fee are constantly occurring. Anyway, through mid-year BBDC's Net Investment Income Per Share (NIIPS) has reached $0.66, including $0.3100 most recently. Earnings would have been better had incentive fees not been higher due to a catch-up payment from prior quarters. The analyst consensus is that BBDC will achieve NIIPS of $1.2000 in 2023 and $1.2400 in 2024. That's notable because analysts are typically presuming the BDC sector will be reporting slightly lower EPS next year than this.
In the short run, BBDC's results should benefit from the July 2023 0.25% rate increase and from our not-so-unusual belief that the Fed will keep rates pretty high for some time. Further down the road, income will be boosted further as the assets from a couple of joint ventures that were not generating much income are redeployed into loans. By 2024, we're also hopeful that proceeds from the resolution of bankrupt - and non-performing - Core Scientific will also get deployed into new interest-bearing assets.
We are also encouraged by the outlook for net book value. The BDC Credit Reporter makes clear that BBDC has a number of underperforming companies on its books - including 6 on non-accrual - but very little in the way of likely further unrealized losses to worry about right now. Importantly, the BDC's portfolio is highly diversified and mostly invested in lower-risk middle-market loans. As a result, BBDC boasts a lower average loan yield than most of its peers but also has less to fear in credit terms. Management is not shy about buying shares at a discount when appropriate - as very successfully shown in the IIQ 2023 - which boosts NAVPS.
BBDC's management has been building up - like many others - an ever-higher reserve of "spillover" income. That should continue into 2024. This provides very useful support in years to come for the maintenance of the distribution even if quarterly EPS wavers. Moreover, management has taken a slow and steady approach to its dividend increases, which makes it less likely that it will need to reverse course when rates begin to fall.
As repeated on the most recent conference call, BBDC's Powers-That-Be are targeting a return on equity (distribution to net book value per share) of 8%-10%. Our projected $1.1000 projection for 2027's payout and the NAVPS of $11.05 results in a 10% ROE - at the upper end of the range.
Buy, Sell, or Hold
February 26, 2023
We've undertaken a full year-end check-up for Barings BDC (BBDC): reviewed the earnings press release, the Investor Presentation, and the 10-K and read the transcript of the conference call. (For our thoughts, see the Daily News Feed in the BDC Reporter) Not so long ago, we also undertook a full credit survey as well over at the BDC Credit Reporter. Everything we've learned has reinforced our earlier projections, so we're not making any changes to our dividend projections through 2027, terminal multiple, or Target Price.
This Update is being written mostly to note that BBDC's quarterly earnings bounced back in the IVQ 2022 after a weak showing for technical reasons due to the varying application of incentive fees from quarter to quarter in the IIIQ. As with everyone else, higher rates also provided an added boost to profitability. Net Investment Income Per Share increased from $0.26 to $0.34. Neither number, though, is really "correct": if one adjusts for a normal incentive fee and operating expenses (unusually low in the IVQ), the "real" NIIPS would have been $0.27. For all of 2023, the analyst consensus for NIIPS is $1.13. That's only $0.01 higher than what BBDC achieved in 2022.
Prescient Or Lucky Guess?
Back on November 11, 2022, when we last updated BBDC (see below) and the stock was trading at $9.16, we wrote the following:
...Given the lower EPS; no increase in the dividend this quarter; not much increase likely ahead and the big credit reverse at Core Scientific (one of BBDC's top 10 investments by size), its stock price might drop in the short term. Would-be buyers might get an opportunity to buy BBDC at a lower price before long.
As this chart shows, in the intervening period BBDC's stock price did fall sharply to as low as $8.10 - a drop of (12%). As of Friday, February 24, 2023, the stock price has partly recovered to $8.64.
BBDC's recent price weakness is bad news for anyone who bought in for the short term. On the other hand, for any long-term investor, this presents an opportunity for a superior return and a high yield.
Already in IQ 2023, the BDC increased its regular distribution to $0.25. Plus there is $0.20 per share of "undistributed taxable income" per share to be doled out at some point and in some way. We're highly confident our projected BBDC 2023 payout will reach - or exceed - our estimate.
Harder To Pin Down
The big variable is BBDC's market valuation. On a 2023 price-to-expected earnings basis, the current multiple is only 7.6x. Using our more esoteric price to expected distribution, the multiple remains a modest 8.4x - one-third below what the BDC has traded for in happier times. Unlike many of its peers - and despite a track record of ever-higher earnings and distributions going back several years - BBDC trades at a (22%) discount to net book value.
Understandably enough, investors are put off by BBDC's current mediocre single-digit percentage return on net book value, both from an earnings and payout perspective. Many other BDCs are generating ROEs in the middle teens. Then there's the potential loss from the Core Scientific position and an above-average cost of borrowing. All of that before we start worrying about what may lie ahead for all leveraged lenders...
Still, there's plenty of time in our long-term approach for BBDC's popularity with investors to grow back again. A low-teens market yield in the here and now thanks to that low price; a highly diversified portfolio and an investor-friendly approach by management all favor being patient. The slow and steady strategy that BBDC practices should regain favor when the market mood shifts. We all know the story of the hare and the tortoise...
November 11, 2022
A Little Different
Barings BDC (BBDC) has reported IIIQ 2022 results, which we've examined in great detail. Besides the earnings release, we've read the 10-Q in detail, covered the Investor Presentation, and heard what management had to say. For the BDC Credit Reporter, we've already gotten around to identifying all the underperforming companies in its very diversified portfolio. What is most notable is that the hybrid BDC has not joined most of its peers in reporting higher EPS this quarter over the prior period and increasing its dividend. Au contraire: Net Investment Income Per Share (NIIPS) dropped from $0.29 to $0.26 and the IVQ 2022 quarterly distribution was unchanged at $0.24 for the third quarter in a row.
Management makes a case that the IIQ 2022 was an earnings anomaly because of unusual income from a CLO investment and the sale of an asset. Truth be told, the BDC's incentive fee and management fee were higher even as NAV Per Share dropped, as did assets under management. On the other hand - like everyone else - BBDC's debt yield has rocketed up with rates to 8.6%, from 7.6% a quarter ago and 7.2% at year-end. As a result, earnings are headed higher - even after accounting for a major new non-accrual in the books (Core Scientific - headed to Chapter 11 bankruptcy or worse). Management is guiding to NIIPS of $0.27 in the IVQ 2022. The analyst NIIPS consensus for 2023 is $1.05, but that seems a tad low.
We get the strong impression that BBDC's management is in no hurry to substantially boost distributions, as others have done. The philosophical argument is that a maximum amount of earnings should be retained in the business to boost NAV Per Share at what is a difficult time for this metric and to fund a substantial stock buyback program promised when Sierra Income was purchased.
As a result, we are keeping our 2023 payout projection at $1.0200, probably mostly paid in the form of quarterly distributions and - maybe - a small "special", if the tax laws require. What is different in our projections is that we've added 2027, given that 2022 is now settled - having reached $0.95. For three years in a row, BBDC has increased its payout: the $0.9500 in 2022 is 15% higher than 2021's result and 76% over the 2019 level. The projected 2023 payout would be 7% over this year's level.
The only other change we've made to the projections is assuming BBDC will maintain the $1.02 annual payout through 2027. Management seems dedicated to avoiding a roll-back and its conservative dividend policy of the moment should benefit future periods.
We continue to use a terminal dividend multiple of 12.5x. In the last 52 weeks, the highest price reached over the $0.95 payout comes to a multiple of 12.1x. In 2021, BBDC's stock price reached $11.42, or 13.9x that year's distribution. The Target Price is $12.75. That would be a record price under Barings and 40% above the current price of $9.11. The yield - using the 2023 $1.02 payout - is 12.0%. The total return for the next 5 years comes to 98% in the Expected Return Table or just under 20% per annum. That's right in line with the current BDC average return amongst the 42 BDCs we're evaluating.
Before we say anything else: we admit to being flawed in calling short-term price movements for individual BDCs, or anything else. This might explain the absence of our own Caribbean island in our list of assets. With that said, given the lower EPS; no increase in the dividend this quarter; not much increase likely ahead and the big credit reverse at Core Scientific (one of BBDC's top 10 investments by size), its stock price might drop in the short term. Would-be buyers might get an opportunity to buy BBDC at a lower price before long. (By the way, the 52-week low is $7.89, and the all-time Barings low is $4.67 - established in March 2020 during the pandemic price riot).
August 26, 2022
"Boring Is Beautiful"
We're going to keep this brief. The BDC Reporter reviewed and annotated Baring BDC's (BBDC) IIQ 2022 earnings conference call and was not much surprised. There were some unexpected developments, like a series of well-deserved promotions in the senior management ranks. Also, EPS was higher than last quarter, and than what the analysts expected, but that was mostly due to the manager not earning the incentive fee due to the "shareholder friendly" look-back feature in its compensation agreement. This sort of benefit cannot be expected to continue indefinitely.
Management - unlike most of its peers - did not promise much higher adjusted earnings in the quarters ahead due to higher rates. The math, though, suggests that there will be a benefit, but BBDC seems loath to say much on the subject. For our part, we expect the quarterly distribution - at $0.24 for the last two quarters- to be raised to $0.25 in the IVQ 2022. If so, that will match our 2022 projection of $0.95, and if not will be immaterially off.
We are making a change for 2023, raising the full-year payout expectation to $1.02 per share, reflecting the benefit of higher rates and - possibly - wider spreads on new loans. For the moment - and maybe a little too conservatively - we are maintaining the same $1.02 a share annual payout for 2024-2026. We are also making no change to the 12.50x terminal multiple, which gives us the $12.50 Target Price for BBDC. At the open on Friday, August 26, 2022, BBDC was trading at $10.15. A 23% increase in price is implied by our projection, but the BDC has traded up to $11.55 in recent months and at a time when earnings and dividend expectations were lower.
The current yield - using the 2022 payout estimate - is 9.4%, but would go to 10.0% in 2023 if we get that higher distribution level. For the record, the current Total Return over the next 5 years is 72% or 14.4% per annum. (Historically, we don't look at the 5-year return because BBDC was Triangle Capital for some of that time. Over three, though, the BDC's average annual return is 10%). That's a "solid" projected return but is slightly under the BDC average - going by our projections. After all, BBDC is a perennially popular BDC stock, which is trading (12%) below its 52-week high and has been increasing its annual distribution every year since 2019. At the moment, BBDC is not on sale, but things can change.