Golub Capital Stock: an excellent return of 9% not to be missed (NASDAQ: GBDC)
High-yielding stocks are attractive to retirees for obvious reasons, but I don’t think they should be reserved for seniors alone. A common refrain for young working adults is to invest in growth stocks because they have a longer investment window. While happens when growth stocks that were overvalued fall precipitously?
The recent tech stock crash is reminiscent of the dot com bust, after which many names never recovered and investors suffered permanent losses. That’s why it may be better to pay at or near fair value for companies in the BDC industry, while being compensated with a decent cash return for holding no matter how the price moves. short term.
This brings me to quality BDC, Golub Capital (NASDAQ: GBDC), which currently boasts a 9% dividend yield that could help meet the income needs of many people. This article explains why GBDC remains an attractive value for income seekers, so let’s get started.
Golub Capital is an externally managed BDC that has been publicly traded since 2010. Currently, it has a well-diversified $5.6 billion investment portfolio across 328 investments in 40 different industries.
It maintains a conservative investment profile, with 94% exposure to senior debt. The bulk (84%) comes in the form of a first lien judgment, which is another word for unitranche debt. In these cases, GBDC is the borrower’s sole lender, allowing BDC to have a closer relationship and more say in important business financial decisions.
This is reflected in the fact that 90% of GBDC’s loans in the second quarter were with a recurring sponsor and over 50% with recurring borrowers. Junior debt represents only 1% of GBDC’s portfolio, and the remaining 5% is made up of equities, which increases the potential for GBDC’s net asset value to increase.
GBDC also maintains adequate diversification, with the average investment representing only 0.3% of the portfolio average, and the top 10 investments representing only 15% of the total portfolio. As shown below, growth and defensive sectors, including technology (software), healthcare, specialty retail and insurance, account for almost half of GBDC’s investment sectors.
Meanwhile, GBDC should continue to benefit from rising rates, as 100% of its debt investments are floating rate, while only a quarter of its funding sources are floating rate, allowing GBDC to leverage advantage of the increase in the distribution of investments. Management highlighted the benefits of the rate hike on the recent conference call:
Short-term interest rates rose significantly during the quarter as the US Federal Reserve sought to address high inflation. GBDC will be able to take advantage of the higher interest rate environment and gained some benefits during the quarter. Almost all of GBDC’s investments are variable rate, while only around 25% of its funding sources are variable rate. Keep in mind that the base rates for different loans reset with some lag, so we haven’t yet taken full advantage of the higher base rates across the portfolio. We believe GBDC will continue to benefit as the higher base rates will be fully realized over the coming quarters.
Additionally, GBDC generated adjusted net investment income of $0.34 per share during the quarter ended June 30, an improvement of $0.07 over the prior year period, and covers more than the quarterly dividend rate of $0.30. Although the net asset value per share decreased by $0.21 to $15.14 during the last quarter, this was almost entirely due to market value adjustments (unrealized losses) in a difficult environment. for public and private market valuations.
I see no reason to worry, as unaccounted investment remains low at just 1.1%, just 10 basis points higher than the prior year period. As shown below, the performance ratings of GBDC’s portfolio companies are currently high by historical standards, with a rating of 5 being the highest quality.
Finally, I see the value of GBDC as its current price of $13.21, which equates to a price/NAV ratio of just 0.87. As shown below, this is at the low end of GBDC’s trading range over the past 5 years, and the stock has traded at a premium in the years leading up to 2020.
Key takeaway for investors
Income investors looking for high yield and exposure to the mid-market lending space could do much worse than GBDC, which trades at a steep discount to NAV. GBDC offers a good mix of diversification, with strong portfolio fundamentals and an attractive, well-hedged dividend. Given that many BDCs reported positive results for the quarter ended Sept. 30, it may be a good idea to overlay GBDC before it releases earnings on Nov. 22.