BDC Update: Fidus Investment
March 8, 2023
We have to admit that projecting out the prospective distributions for Fidus Investment (FDUS) is one of the hardest out of the forty-one BDCs we track. It's not only that the lower middle market BDC generates distributable income from both recurring sources and episodic net realized gains, but we also need to guess what management's dividend policy will look like.
There's no denying, though, that FDUS has been very successful of late and has become an investor favorite that gained in price during 2022 when just about everyone else was in the red. Now that we've seen the full calendar year results, the numbers are impressive: Adjusted Net Investment Income Per Share (ANIIPS) reached $1.88, beating out $1.77 in 2021; NAV Per Share (NAVPS) increased by 0.1% in the IVQ 2022 and - the piece de resistance - total payout to shareholders for the year came to $3.65 (including a deemed distribution) compared to $1.6000 in 2021.
Most important of all to us, though, is what comes next. After our review of the latest numbers, we're increasing our prior dividend projections. Starting with 2023, we're predicting the total payout will reach $2.7700. Management has already announced 3 different dividends for the first quarter of this year amounting to $0.66, or $2.64 annualized. With a huge undistributed amount of taxable income yet to be paid out and recurring earnings on the increase thanks to higher rates (the analyst consensus is for ANIIPS of $2.18) another bountiful year looms ahead. In 2024, we are projecting a payout of $2.8500.
From 2025 and through 2027, we expect the annual payout (always a mix of undistributed net investment income, current NII, and new net realized gains) to fall back to $2.4000. That may be below the 2022 and 2023 peaks but still considerably higher than in prior years. We continue to use a terminal multiple of 12.0x.
That prospective return is well below the current BDC average and speaks to the high popularity of the stock, currently trading close to both its 52-week and all-time highs and at a premium to net book value. If you'd bought and held FDUS 5 years ago when FDUS was less in favor things would have turned out differently. -According to Seeking Alpha's calculations - your total return would have been 169%, the second highest of all BDCs in existence for that period.
August 30, 2022
Projecting out the likely distribution level for Fidus Investment (FDUS) for one year - let alone five - is very hard to do and we are inevitably going to be wrong. That's mostly because - unlike some BDCs - FDUS generates both recurring earnings from its lending activity AND net realized gains from the many equity stakes held in its portfolio companies. The former is relatively predictable while the latter is all over the place.
So Many Options
Making the situation worse is that FDUS has great latitude in how and when to distribute realized gains. The proceeds might appear over a period of years and in several possible different forms including as a regular distribution, a "special" that is either paid in full or over multiple periods or a "deemed distribution" where the BDC pays in the tax due on the shareholder's behalf but keeps the non-taxable portion. Right now, even FDUS itself probably does not know what it's undistributed taxable income adds up to, but it's certainly huge. We're using a $3.0 per share number that includes gains occurring in the IIIQ 2022.
After reviewing IIQ 2022 performance at the BDC, we've updated the Expected Return Table in a number of ways. First, the analyst consensus numbers for EPS in 2022 and 2023 have been increased to $1.77 and $1.91 respectively. That's roughly a 10% jump from what the analysts were predicting before.
To date FDUS has paid or announced $1.82 per share in total payouts through the end of the year, way over the $1.60 paid out in 2021. Even now, though, there's a chance that an additional supplemental distribution will be made for calendar 2022 to meet tax requirements. We're maintaining our earlier projection for 2023-2026 of $2.2000 of annual distributions and added 2027 at the same level. This leaves the Target Price (based on a 12.5x terminal multiple) at $26.40. FDUS has been trading up all year and is now at $20.22, but has been as high as $21.15. Still, the Target Price would be a record high, if achieved.
The current yield - using the 2022 distributions to date - is 9.0% but will be 10.9% if our projection for the 2023 payout is right. The latest total return over 5 years is 85%, or 17% per annum. That's below the historic 115% total return showing in the Seeking Alpha table, and average by current BDC standards. That's because FDUS - unlike most BDCs - has been trading at historic highs even in the midst of difficult market conditions. The BDC is one of only 5 BDCs out of 43 up in price on a YTD basis in 2022, with a 15% gain since 12/31/2021.
Love 'Em But Leave Them Alone
We've always been impressed by FDUS - even before the BDC hit the big time and our confidence has been repaid with this excellent run of recent results, now showing up as very high distributions paid or promised. However, we are far from alone in this admiration - which has caused the stock to trade at a premium to net book value per share. Given the high price; the uncertainty about what actual payouts might be and the potential impact a recession might have on a BDC that invests heavily in the junior capital of lower middle market companies, we are not adding to what we own even though our long term confidence in FDUS, its management and strategy remains undiminished.