I'm always searching for those unique companies that have both a large estimated one year capital gain and a nice annual dividend yield to add to my portfolio. Two companies that fit that description are Ares Capital Corporation and Main Street Capital Corporation.
Ares and Main Street are both classified as Business Development Companies (BDC) and both companies offer a large one year estimated capital gain and a large annual dividend. BDCs are companies that make loans to companies that aren't large enough to gain the attention of the large banks but too large or too well developed for the Venture Capitalists.
BDCs were initially created to fill the needs of small businesses that had previously outgrown their need for early stage venture capitalism and had now entered into the realm of the publicly traded companies. These companies are usually in their initial stages of expanding beyond the startup stage. These small companies are often still too small for the Big Banks to consider doing business with them so they're generally forced to turn to BDCs for help.
To qualify as a BDC, companies must be registered in compliance with Section 54 of the Investment Company Act of 1940. A major difference between a BDC and a venture capital fund is that BDCs allow smaller, non-accredited investors to invest in startup companies. Some of the reasons why BDCs have become so popular among investors is that they provide permanent capital to their management, they allow investments by the general public and they use mezzanine financing opportunities. Ultimately they're fulfilling the financial needs of a certain sector of the economy.
BDCs allow any investor who's interested in participating in the realm of venture capitalism or small business equity loans to participate through the open market. This feature allows BDCs to raise money and grow faster than Venture Capital Funds which are generally closed end funds created by, and for, wealthy investors only.
There are quite a few publicly traded BDCs and many of them are listed on this site in the section labeled "Business Development Companies" which can be found in the Investing drop down menu above or by clicking here. While there are many great companies listed, and I own stock in a number of those listed companies, two of my favorites are Ares Capital Corporation and Main Street Capital Corporation.
Ares Capital Corporation
| Ares Capital Corporation (ARCC) specializes in acquisition, recapitalization, mezzanine debt, restructurings, rescue financing, and leveraged buyout transactions of middle market companies. It also makes growth capital and general refinancing. It prefers to make investments in companies engaged in the basic and growth manufacturing, business services, consumer products, health care products and services, and information technology service sectors. The fund will also consider investments in industries such as restaurants, retail, oil and gas, and technology sectors. It focuses on investments in Northeast, Mid-Atlantic, Southeast and Southwest regions from its New York office, the Midwest region, from the Chicago office, and the Western region from the Los Angeles office. The fund typically invests between $20 million and $200 million and a maximum of $400 million in companies with an EBITDA between $10 million and $250 million. It makes debt investments between $10 million and $100 million The fund invests through revolvers, first lien loans, warrants, unitranche structures, second lien loans, mezzanine debt, private high yield, junior capital, subordinated debt, and non-control preferred and common equity. The fund also selectively considers third-party-led senior and subordinated debt financings and opportunistically considers the purchase of stressed and discounted debt positions. The fund prefers to be an agent and/or lead the transactions in which it invests. The fund also seeks board representation in its portfolio companies. (Daily Chart) (Weekly Chart) | 30 December Price $15.77 1yr Target $18.23 Analysts 14 1yr Cap Gain 15.59% Dividend $1.52 Yield 9.63% 1yr Est Tot Return 25.22% Market Cap $4.95 Bil Beta 0.96 EPS (ttm) $1.91 Payout Ratio 79.58% EPS next yr $1.51 P/E 8.26 PEG 2.12 Forward P/E 9.89 Debt/Equity 0.70 ROA 6.70% ROE 11.40% ROI 5.50% Sales $951.80 Mil Income $571.40 Mil Profit Margin 60.03% |
Main Street Capital Corporation
| Main Street Capital Corporation (MAIN) is a business development company specializing in long-term equity, equity related, and debt investments in small and lower middle market companies. The firm focuses on investments in warrants, PIK (Payment in Kind) interest, convertible securities, junior secured or unsecured, subordinated loans, private equity, venture debt, mezzanine investments, mature, mid venture, industry consolidation, later stage, late venture, emerging growth, management buyouts, ownership transitions, recapitalizations, strategic acquisitions, business expansion, growth financings, and other growth initiatives primarily for later stage businesses. It does not seek to invest in start-up companies or companies with speculative business plans. It seeks to invest in traditional or basic businesses. The firm primarily invests in companies based in the Southern, South Central, and Southwestern regions of the United States but also considers other domestic investment opportunities. It invests between $2 million and $15 million in companies with revenues between $5 million and $300 million, enterprise values between $3 million and $50 million, and EBITDA between $1 million and $20 million. The firm seeks to charge a fixed interest rate between 12 percent and 14 percent, payable in cash, in case of its mezzanine loan investments. The firm typically invests in the form of term debt with equity participation and/or direct equity investments. It prefers to maintain fully diluted equity positions in its portfolio companies of 5 percent to 50 percent, and may have controlling interests in some instances. The firm also co-invests with other investment firms. It seeks to exit its debt investments through the repayment of the investment from internally generated cash flow and/or refinancing within a period of three to seven years. Main Street Capital Corporation was founded in 1997 and is based at Houston, Texas. (Daily Chart) (Weekly Chart) | 30 December Price $29.30 1yr Target $35.40 Analysts 5 1yr Cap Gain 20.81% Dividend $2.04 Yield 6.96% 1yr Est Tot Return 27.77% Market Cap $1.32 Bil Beta 0.83 EPS (ttm) $2.32 Payout Ratio 87.93% EPS next yr $2.38 P/E 12.63 PEG 1.80 Forward P/E 12.29 Debt/Equity 0.63 ROA 6.80% ROE 11.50% ROI 5.80% Sales $135.40 Mil Income $99.90 Mil Profit Margin 73.78% |
My Perspective
I believe that both of these companies are solid companies fundamentally and are also in great shape technically. I own stock in both of these companies and I continue to monitor each of them for further accumulation. I've found both of these companies to be extremely beneficial in providing nice dividends that I have used to reinvest in these companies and to accumulate shares in many additional companies.
While there may be BDCs listed on the exchanges that either pay higher dividends or have a greater one year estimated capital gain, I still want to own these particular two companies. I'm very comfortable having these shares in my portfolio. I've found each of them to be conservative growth companies that are also growing their dividends over time. I expect each of these to remain as core holdings in my accounts for a very long time.
While there may be BDCs listed on the exchanges that either pay higher dividends or have a greater one year estimated capital gain, I still want to own these particular two companies. I'm very comfortable having these shares in my portfolio. I've found each of them to be conservative growth companies that are also growing their dividends over time. I expect each of these to remain as core holdings in my accounts for a very long time.
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