Barings BDC: Should You Buy The 20% Discount To NAV And 11.6% Dividend Yield? (BBDC)

Buying stocks at a discount to their intrinsic value is great. For most sectors, establishing this value can sometimes be more art than science. Business development companies have operations built on originating investments with their balance sheet to earn investment income. Hence, their intrinsic value is tethered to net asset value at the hip. Barings BDC (NYSE:BBDC) is an externally managed BDC that primarily makes debt investments in middle market companies. Its investment portfolio at fair value was $2.52 billion at the end of its fiscal 2023 third quarter, spread across 335 issuers.

This means roughly $7.5 million of investments per issue against an 89% floating rate portfolio. The BDC’s weighted average yield on floating rate investments increased 20 basis points sequentially to 11.2% with the portfolio having a 67% concentration to first lien debt. BBDC’s manager Barings LLC is a $347 billion global investment firm operating out of Charlotte, North Carolina. Income is always the goal but BBDC’s NAV at the end of its third quarter at $1.2 billion, around $11.25 per share, means it is currently trading hands at a 20% discount to NAV. To hijack bond terminology, it’s trading for roughly 80 cents on the dollar to open up a capital gain opportunity for shareholders.

The BDC last declared a quarterly cash dividend of $0.26 per share, kept unchanged sequentially for what’s currently an annual dividend payout of $1.04 for an 11.6% dividend yield. A fat double-digit dividend yield wrapped around the margin of safety benefits posed by a 20% discount seems like a great deal but BBDC’s discount is a reflection of NAV on a nominal basis that’s been slightly dipping since the start of 2022. The market likes growth.

Investment Income And Dividend Coverage

BBDC recorded a total investment income of $70.85 million during its third quarter, up 25.8% over its year-ago comp but a miss of roughly $2.2 million on analyst consensus. Growth was driven by the year-over-year rise in yield on its debt portfolio which drove total interest income to $55.41 million from $40.64 million in the year-ago quarter. Net investment income (“NII”) at $33.31 million was up $5.4 million, around 19.3%, from its year-ago comp.

NII at $0.31 per share covered the quarterly dividend distribution by 119% with coverage lifted from the year-ago quarter when BBDC covered what was a lower $0.24 quarterly dividend by 108% from NII of $0.26 per share. Stronger dividend coverage is great for shareholders and has come with an ongoing share repurchase program launched in March 2023 that has so far bought back 1,400,000 shares at an average price of $7.75 per share. The ongoing dip in weighted average shares outstanding comes after the marked increase that came with the early 2022 all-stock merger with Sierra Income Corporation.

The decline in NAV per share by roughly 9 cents was led by a $0.16 per share net realized loss on investments and foreign currency transactions that were in excess of NII when added to the dividend for the quarter. NAV per share has stayed quite stable over the last few years since the pandemic with the figure at $11.40 per share two years ago and with a peak of $11.86 per share at the end of the first quarter of 2022.

Underwriting Quality And Leverage

Critically, BBDC’s dividends have been pulled upwards over the last five years, recording a 14% compound annual growth rate from $0.15 per share in 2019 to its current level. The higher coverage ratio could see the dividend hiked by low single digits sometime in 2024 even against expectations for the Fed to cut interest rates by at least 150 basis points this year.

Critically, BBDC’s core risk metrics are not flashing red. Loans on non-accrual status comprised 1.6% of the portfolio at fair value, up 50 basis points sequentially but still low. The risk here is that it continues to rise against what’s already been a 2.29x increase in non-accruals versus the year-ago comp of 0.7%.

Third quarter total payment-in-kind interest income at $3.98 million was up from $3.27 million in the year-ago period but formed 7.18% of total interest income. This was down from 8.04% in year-ago comp. BBDC’s leverage at 1.27x has been rising but still sits at a decent level when compared to its peers. I think BBDC forms hold here on the discount to NAV and the double-digit dividend yield set within healthy NII coverage.