Hercules Capital Stock: 10% return, wake up and feel the cash flow (NYSE: HTGC)
I love good market sell-offs because they provide great opportunities to stock up on highly respected dividend payers at high yields. For some investors, that may mean adding moat-worthy names like VF Corp. (VFC) or Comcast (CMCSA) at significant discounts to historical valuations. For others, it may mean adding BDC’s top names to tax-advantaged retirement accounts, allowing for a faster capitalization rate.
This brings me to Hercules Capital (NYSE: HTGC), which is once again trading in bargain territory after falling into sympathy with the rest of the market. In this article, I highlight why now may be the time to recover this quality stock before it reverts to its average, so let’s get started.
Hercules Capital is one of a handful of internally managed business development firms (“BDC”) focused on providing loans and equity investments in emerging technologies and life sciences . Since its inception 19 years ago, Hercules has deployed more than $15 billion in investment capital in 590 companies and is, in many cases, a lender of choice for entrepreneurs and venture capitalists alike. looking for growth capital financing.
Hercules stock has seen some volatility in recent months, and patient investors have seen plenty of opportunities to reload at opportune prices. It looks like another opportunity has presented itself. As shown below, HTGC is now trading below its 50- and 200-day moving averages, and is showing an RSI score of 38.7, indicating that it is heading into oversold territory.
Meanwhile, its business is doing very well, as it recorded a record $1.0 billion in debt and equity issuances during the second quarter, bringing total issuances to 1, $66 billion in the first half. This signals strong demand for HTGC capital as many private companies in the technology and life sciences sectors delay their IPOs and M&A activities due to market volatility, thus requiring more short and medium term funding.
The portfolio is also well managed, with nearly three-quarters (74%) of the debt portfolio consisting of senior secured loans and 24% second lien loans, with Hercules retaining the right to redeem the first lien holder. .
Hercules also maintains a close direct relationship with its borrowers (comparing favorably to syndicated creditors) and is often the sole lender to its borrowers. Borrowers, in turn, benefit from the wealth of experience of the Hercules management team, as they draw on their expertise in financial markets.
In addition, Hercules maintains a solid track record, with only 2 investments in unrecognized status representing only 0.1% of the fair value of the portfolio. It also generates a healthy 11.5% effective return on debt investments and has $780 million in available cash to fund its deal pipeline. Leverage does not appear to be an issue, as it maintains a statutory debt-to-equity ratio of 0.93, well below the regulatory limit of 2.0.
Factors that could push HTGC’s share price down include further tightening by the Federal Reserve, which could introduce further economic uncertainty. However, despite the hardline rhetoric, I think the Federal Reserve will always try to maintain a fine line between controlling inflation and outright economic collapse.
In addition, HTGC actually benefits from the higher tariffs. As the CEO noted on the recent conference call, the NII per share in the second quarter would have been $0.35 had he seen high rates throughout the quarter. This implies that the regular $0.35 dividend should be at least fully covered in Q3, with everything else at least equal.
In the second quarter, we generated total investment income of $72.1 million and net investment income of $40.1 million or $0.32 per share. Assuming the interest rate increases that took place during the second quarter were in place at the start of the quarter, our second quarter NII per share would have been around $0.35, even with the lower level of prepayment activity during the quarter.
During the second quarter, our portfolio generated a record over $70 million in base revenue, which excludes any benefits received from prepayments. We expect base income and net investment income to grow further in the third quarter and net investment income per share to fully cover the recently raised base distribution in the third quarter. – CEO of Hercules Capital
Finally, I find Hercules Capital to be quite cheap at the current price of $14.07 with a regular dividend yield of 10%. It carries a forward PE of just 10.3 and analysts estimate robust 13% growth in the NII per share next year. Sell-side analysts have a consensus Buy rating on Hercules with an average price target of $16.75, which translates to a potential total return of 29% over one year, including dividends, and special dividends could further increase this.
Key takeaway for investors
Hercules Capital is a well-managed lender to high-growth companies, and its focus on technology and life sciences companies gives it a niche in the market. The company was able to grow its originations and portfolio while maintaining excellent credit quality.
It also pays an attractive 10% dividend yield, making it a very attractive income game. At its current price of $14.07, I believe Hercules Capital represents attractive value with a healthy dividend yield and strong upside potential.