November 15, 2023
It's time for a check-in at Goldman Sachs BDC (GSBD). We first wrote about the BDC back in November 2021 (scroll down for a refresher) in what was an entirely different environment. GSBD was one of our earliest Best Ideas - more on that in a minute. At the moment, we can report that GSBD is closing out its distributions for 2023 with yet another $0.45 quarterly distribution for the IVQ 2023. That brings the full-year payout to $1.80, unchanged for yet another year. The BDC has paid that same total distribution every year since 2019, which is how far back the Expected Return historical data goes. This is in line with our expectations, even two years ago.
Results & Outlook
The BDC's earnings - going by the BDC's favored Adjusted Net Investment Income Per Share (ANIIPS) - are booming through the first 9 months of 2023. We project that ANIIPS will come to $2.32 for the full year, beating out $2.11 in 2022 and $1.92 in 2021. That's a 20% increase over two years, and way above the distribution. Management seems to be adopting the popular approach of squirreling away much of their earnings for a later day. Undistributed net investment income per share comes to $1.13 per share - 2.5x quarters of distributions. NAV Per Share (NAVPS) increased slightly in the most recent quarter but has dropped a disappointing (8%) since the IIIQ 2021 balance sheet from whence we started.
Back in November 2021, we projected GSBD would continue to pay out that $1.80 a-year dividend for 5 years. We're holding to that number even now and through 2028. We also projected that the BDC would eventually trade at 12.5x its annual payout, giving a Target Price of $22.50. Thankfully, this was a long-term projection because GSBD's stock price - high earnings and stable distributions notwithstanding - has fallen in the intervening time, and under-performed the sector as measured by the BDC ETF BIZD:
When we called GSBD a "Best Idea", the stock was trading at $18.88 and this morning - two years later - the BDC traded for $14.95. That's a ($3.93) unrealized drop. However, this is neatly offset by $3.60 of distributions received - and $4.05 when the latest distribution goes ex-dividend on December 29. This is more or less a break-even result to date. This is also a potent reminder that distributions offer - over time - protection against price decreases - in this case (20%). The $3.60 received equals 19% of the initial cost and represents an annual yield of about 9.5%.
With the benefit of hindsight, investor dissatisfaction seems reasonable enough given that GSBD managed to book roughly ($230mn) in realized and unrealized losses in the past two years. These losses include some permanent losses of about ($65mn). Total losses amount to well over a tenth of the BDC's equity capital at par, impacting both borrowing and earnings power. Although losses have lessened of late, 9.0% of the BDC's portfolio is currently in the underperforming category and there are 11 companies on non-accrual on the books. That's within a tolerable range, but GSBD has not covered itself in credit glory during a relatively benign period of time.
When we first wrote about GSBD we were implicitly assuming the BDC would be able to maintain a stable NAV. Instead - in over two years - NAVPS is dropping at a (4%) annual pace, or (20%) over 5 years. Unfortunately, that's in line with the BDC's track record since 2017. In our recently revised valuation methodology those sorts of losses - which may well continue - do not justify the 12.5x multiple of the payout we have been using to calculate a Target Price. 9.5x seems more appropriate, changing the top price to $17.10. We're making that change to the Expected Return Table.
It's unfortunate that GSBD has not met our expectations of two years ago and does not seem likely to in the future. However, the market appears to have acted rationally to the above-average losses involved and the absence of any dividend increase even when rates shot up. If the BDC can improve its credit metrics in the future, the potential value of the BDC might increase beyond our Target Price, so we'll keep close tabs on performance. In the interim, and despite the pullback in the BDC's stock price, there are more compelling buying opportunities elsewhere.
February 24, 2023
We're glad to report that yet another has come and gone at Goldman Sachs BDC (GSBD) without any need to change the initial dividend and valuation projection we made in November 2021, which seems like an eon ago. In those days, when a 15% per annum Total Return was hard to find, we plumped for GSBD as a "BDC Best Idea", assuming a $1.800 per annum payout every year for half a decade and a terminal multiple of 12.5x, which resulted in a Target Price of $20.50.
Then Vs Now
Now, the BDC has just announced its IVQ 2022 results and held its earnings conference call. Since we last wrote - based on the IIIQ 2021 results - the BDC has increased its portfolio size by 13% and its debt to equity from 0.9x to 1.3x and seen its NAV Per Share drop from $15.92 to $14.61. However, adjusted Net Investment Income Per Share has increased from $0.48 to $0.65 - a 35% jump. You can guess why that happened.
Unchanged over these two periods is the "regular" quarterly distribution of $0.45. GSBD has paid out that same dividend for 32 quarters in a row, or 8 years. That includes the IQ 2023, which remains at $0.45 despite those red-hot earnings. On this latest conference call management did not address how they might handle their overflow earnings going forward, and nobody asked. We're guessing there's a decent chance GSBD might pay out a "supplemental" dividend at some point in 2023, but we're not making any change yet to our projections, which continue to expect a $1.8000 annual payout for another 5 years.
We're not bothered that GSBD's price has fallen since calling the stock a Best Idea. The sector itself has dropped (12%) over that same period. Anyway, for those of you counting at home, the "total return" - once you figure in 5 dividends received and one on the way - is almost at break-even. We're only through one-quarter of the investment period BDC Best Ideas works within. What is reassuring is that the dividend has not altered - as we projected - and seems in no imminent danger.
However, the world has changed and there are now more than 20 BDCS offering better long-term returns. That's the beauty of the Best Ideas "system": the constantly changing landscape of BDC investment opportunities.
Published 11/5/2021 as a BDC Best Idea Pick
Let's be honest, Goldman Sachs BDC (GSBD) is not a market favorite going by its stock price. On a 2021 YTD basis, the BDC is the second worst performer at the time of writing: down (1.5%). Over a 12-month period, which has included a huge BDC rally, the stock is the second to last worst performer as well. To be fair, GSBD is trading at an 18% premium to book, but at "only" a 10.4x multiple of its recurring distribution, while many of its peers go for 11x, 12x, or even 15x. Yet GSBD has never reduced its dividend since going public in 2015; paid a generous "special" dividend in 2021 after merging with its non-traded sister BDC and has one of the lowest management fee structures in the industry.
Once Upon A Time
This investor indifference is all the more ironic because GSBD was a very "hot" stock when first coming to market, reaching a high of $25.6 in 2017. This might have been - with the benefit of hindsight - a matter of supply and demand as not all the shares were tradable. Today GSBD - many years wiser and with roughly the same earnings and dividend - opened at $18.88 - (26%) lower. The current annual distribution is $1.80, representing a yield of 9.5%, high by BDC standards.
Some investors are worried that the BDC - which just posted adjusted Net Investment Income Per Share of $0.48 in the IIIQ 2021 - won't have the earnings power to "cover" its distribution in the future when the investment advisor's fee subsidy - set up at the time of the merger with its sister fund - expires at year-end. We're not so worried as the latest subsidy amounted to only 1.4 cents a share, not much of a crutch. Furthermore, GBSBD is only leveraged at 0.9x and could add nearly five hundred million of new investment assets before reaching its self-imposed target leverage. What's more, the BDC has nearly $1.3bn of liquidity and ready access to the unsecured debt market if the need arises for more capital.
GSBD's credit outlook is improving - despite adding a new - small - non-accrual to the books in the most recent quarter. Just 5.5% of the portfolio is underperforming and most are well-known, deeply written down trouble spots like Bollttech Mannings, Kawa Solar Holdings, that spectacular misstep called Animal Supply Holdings, and Country Fresh Holdings. At the height of the pandemic, GSBD's underperformers reached 16.8% and have been declining reassuringly ever since.
Unlike many of its peers, GSBD neither reduced its dividend in 2020 in the face of lower income from LIBOR loans undertook a Rights Offering or took on expensive debt, or changed its well-established middle market strategy. A boatload of new shareholders have been added from the sister BDC without impacting the quarterly payout, and as mentioned management has taken "shareholder friendly" steps like dropping the management fee hugely and setting up an automatic stock repurchase program.
Any reasonable downside seems limited. When we assumed a dividend of $1.60 over 5 years and a terminal multiple of only 10x, the target price dropped to $16.00. On a total return basis, though, GSBD would still generate a positive gain of 27% or 5.4% per annum. Nothing to write home about, but not a disaster.
So, GSBD is our newest Best Idea.
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