Tuesday, March 18, 2014

FDUS: February 2014 Report

Summary and Recommendations

Fidus Investment (FDUS) is part of my suggested ‘total return’ portfolio that is considered the portfolio for more savvy type BDC investors focused on more than just regular dividend yield.  I consider FDUS a ‘Hold’ only due to its current pricing but in the long run I believe it will outperform many of the other BDCs with higher return.

There are many things that set FDUS apart from the other BDCs including its slower and selective approach to picking portfolio companies.  One of the key focuses of management is industry diversification and choosing investments that will outperform in a challenging economic environment.  Many externally managed BDCs are growing much faster driving higher fees to the Investment Advisor and may not be acting in the best interest of shareholders.

One of the key advantages of FDUS is its ability to increase its net asset value (“NAV”) per share more than most BDCs (see page 12) while paying regular and special dividends.  After taking into account all of these returns I expect FDUS to return 11.5% to 13.5% to investors over the next 12 months.  Currently the company has over $16 million in spillover income that could be used to pay future special dividends or grow the portfolio.  This is almost $1.20 per share and equivalent to 9 months of regular dividends.  Both the recent NAV growth and special dividends are due to FDUS’s approach to selective investments with equity positions in 85% of its portfolio companies with an average fully diluted equity ownership of 8%.  This is more of a partner approach to investing with skin in the game.

FDUS is the only BDC with 100% of its borrowings in SBA debentures at 10-year fixed rates, interest only and are excluded from debt-to-equity regulations for BDCs.  The company has been prudent about raising equity and diluting shareholders, usually waiting for optimal leverage points to maximize returns before issuing shares.  I believe this shows tremendous restraint on the part of management and is probably another reason investors are willing to pay a premium.

Some of my key concerns are its overall investment mix with 71% of investments in subordinated notes and a higher than average portfolio yield.  However after taking into account having no loans on non-accrual, its growing NAV and considerably lower portfolio company leverage metrics (see page 10) I believe FDUS has safer investments than other BDCs.

This article discusses the pros and cons of investing in FDUS along with earnings projections, dividend sustainability and growth potential over the coming quarters including best and worst case scenarios as well as key risk considerations, updated rankings/pricing compared to the other 25 BDCs that I follow.
Also included:
  • Interest rate sensitivity analysis
  • Timing for future share issuances
  • Projected total returns compared to the other BDCs
  • Price target based on expected total returns
  • Pricing based on multiples of NAV and projected earnings
  • Overall rankings and recommendations

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