• Tue. Oct 3rd, 2023

Golub Capital Stock: I Am Buying This 8.6% Yielding BDC (NASDAQ:GBDC)


Aug 21, 2022
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The United States’ economy is in a slump, and persistently high inflation makes it difficult for income investors to protect their purchasing power.

Golub Capital BDC Inc. (NASDAQ:GBDC) can, in my opinion, assist investors in mitigating economic risks due to the BDC’s first lien-focused investment strategy.

Golub Capital covered its dividend with net investment income in 3Q-22, while net asset value fell slightly QoQ. The stock trades at a 7% discount to NAV, providing investors with a small margin of safety.

Portfolio Actions

Golub Capital invests with a safety-first mindset, focusing almost entirely on the highest forms of available debt: First Liens.

First Liens accounted for 84% of the business development company’s investments at the end of the quarter, a 4% increase from the previous quarter.

At the end of 2Q-22, the total weighting towards First Liens (both one stop and traditional senior) was 94%. The total allocation to investments other than First Liens increased by 2 percentage points YoY and remained stable at 6% QoQ. Aside from First Liens, Golub Capital primarily invests in equity and junior debt.

Portfolio Highlights

Portfolio Highlights (Golub Capital BDC)

Golub Capital’s portfolio value increased by $187.4 million QoQ to $5.6 billion, with new investment commitments totaling $449.6 million. In the second quarter, approximately 95% of new investments were made in the First Lien category, which is already Golub Capital’s core investment product. Equity investments accounted for approximately 5% of new investments in 2Q-22.

Investment Activity

Investment Activity (Golub Capital BDC)

Yields May Come Under Pressure

Golub Capital’s portfolio yields remained stable in 2Q-22, but rates are rising, and the BDC’s rising interest rate costs may limit its ability to generate attractive yields in the future. Golub Capital’s investment income yield was 7.5% in 2Q-22, up 0.2 percentage points QoQ.

Positioned For Higher Interest Rates

Positioned For Higher Interest Rates (Golub Capital BDC)

Credit Quality

BDCs primarily invest in high-quality debt instruments, so borrowers must be able to repay whatever money they borrow. Golub Capital has no major issues in this regard. The business development firm’s non-accruals did not rise in the last quarter, indicating that credit quality remained stable. Non-accruals at Golub Capital remained stable in 3Q-22, at 1.1% at fair value or 1.5% at cost.


Non-Accruals (Golub Capital BDC)

Q2’22 Dividend Pay-Out Metrics

Golub Capital’s stronger business results in 3Q-22 were driven by a recovering economy, which allowed for robust net investment income growth compared to the 2021 period. Golub Capital’s net investment income in 3Q-22 was $53.9 million, a 28% increase over the previous year’s NII of $42.1 million.

I use Golub Capital’s adjusted net investment income, which includes the capital gain incentive fee paid to the external manager, to calculate dividend pay-out ratios. The BDC’s adjusted NII in 3Q-22 was $0.34 per share, up from $0.30 in 3Q-21.

As a result, Golub Capital’s dividend payout was easily covered by adjusted NII (pay-out ratio of 88%). Golub Capital distributed 98% of its adjusted net investment income over the last twelve months.

NII, Dividend And Pay-Out Ratio

NII, Dividend And Pay-Out Ratio (Author Created Table Using BDC Information)

Net Asset Value Dropped Only Marginally

Golub Capital’s net asset value fell $0.21 per share in the third quarter due to unrealized depreciation on the BDC’s investments of $0.24 per share. The drop in net asset value was relatively minor (1.4% QoQ), and the BDC’s credit quality remained strong.

NAV Per Share

NAV Per Share (Golub Capital BDC)

Golub Capital’s stock is currently yielding 8.6% and trading at a 7% discount to net asset value. Given that the BDC is invested in a very conservative debt portfolio, the NAV discount provides a reasonable margin of safety.

GBDC Price to Book Value data by YCharts

Why Golub Capital Could See A Lower Valuation

I’m not concerned about Golub Capital’s First Lien performance right now. Golub Capital’s safety-first investment strategy, combined with strong NII growth and low non-accruals, indicates that the business development firm is running a healthy investment portfolio.

Things could change for Golub Capital if the BDC saw a rapid increase in non-accruals, but given the company’s First Lien focus, I don’t see this happening.

My Conclusion

I’m buying Golub Capital like crazy because I believe the BDC will do well with its conservative approach to underwriting and investing, especially in a downturn.

With the majority of its investments in secured and relatively safe First Liens, Golub Capital can be at ease even if the U.S. economy enters a deeper recession.

In addition, the business development company maintained good dividend coverage in the third quarter, and the stock is trading at a 7% discount to net asset value, which is a plus.


Image and article originally from seekingalpha.com. Read the original article here.