I wrote my last article on VanEck Vectors BDC Income ETF (BIZD) on July 10th. Since then, BIZD reached my target price of $12.27, and I began making preparations to liquidate my position. As I normally do, I updated my model, and while I was updating that model, I discovered that the managers at VanEck made some changes to BIZD’s portfolio. My projections for BIZD increased due to this change, changes in portfolio weights, and a decrease in BDC risks.

Table 1 – Alpha From BIZD Investment

BIZD r% RFR % S&P r% BETA ALPHA
22.9% 0.7% 17.2% 0.89 7.5%

Source: Public Data

As seen in Table 1, those who invested in BIZD in late April, when I made my first bullish call on the ETF, would have received an alpha of 7.5% from their investment. Both the BIZD and S&P 500 returns take into consideration dividends received during the analysis period.

Third-Quarter Dividend Distribution

BIZD announced on October 1st that it would distribute a dividend of $0.3603 to its shareholders. BIZD’s 3Q20 dividend was 6.3% less than its 2Q20 dividend and 1.9% less than its 3Q19 dividend.

Table 2 – 2019 and 2020 Dividends

2019 2020 Div. g%
1Q Dividends $0.4100 $0.3562 – 13.1%
2Q Dividends $0.3861 $0.3847 – 0.4%
3Q Dividends $0.3671 $0.3603 – 1.9%
4Q Dividends $0.3664 $0.3622* – 1.1%

Source: Seeking Alpha and analyst’s estimates (*)

What I find most interesting about the information in Table 2 is that the 1Q20 dividend is the main reason why BIZD’s yearly dividend distributions decreased by 4.3% (includes my estimated 4Q20 dividend). The 1Q20 dividend was declared on 04/01/2020, a couple of weeks after the stock market had declined due to the expectations that the novel coronavirus would harm the economy. Though I can’t prove it with the data

Focus of Article:

The focus of this two-part article is a very detailed analysis comparing Ares Capital Corp. (ARCC) to some of the company’s business development company (“BDC”) peers (all sector peers I currently cover). I am writing this two-part article due to the continued requests that such an analysis be specifically performed on ARCC and some of the company’s BDC peers at periodic intervals. For readers who just want the summarized conclusions/results, I would suggest to scroll down to the “Conclusions Drawn” section at the bottom of each part of the article.

PART 1 of this article analyzed ARCC’s recent quarterly results and compared several of the company’s metrics to fourteen BDC peers. PART 1 helps lead to a better understanding of the topics and analysis that will be discussed in PART 2. The link to PART 1’s analysis is provided below:

Ares Capital’s NAV, Dividend, And Valuation Vs. 14 BDC Peers (Post Q2 2020 Earnings – Very Attractive Valuation)

PART 2 of this article compares ARCC’s recent dividend per share rates, yield percentages, and several other highly unique dividend sustainability metrics to fourteen BDC peers. This analysis will show recent past data with supporting documentation within Table 3 below. This article will also project each company’s dividend sustainability for the calendar fourth quarter of 2020 which is partially based on the metrics shown in Table 3 and several additional metrics shown in Table 4 below.

By analyzing these metrics, one will better understand which BDC generally has a safer dividend rate going forward versus other peers who have a higher risk for a dividend decrease or a higher probability of a dividend increase and/or a special periodic dividend being declared. This is not the only data that should be examined to initiate a position within a particular stock/sector

Macro

The high yield spread, as shown by the St. Louis Fed graph below, has improved significantly since it blew out in March’s COVID-19 crash. Thus, the spread is nowhere near the 8%+ peaks (vertical green lines) which have previously marked particularly attractive Business Development Company ‘BDC’ buying points.

Source: St. Louis Fed and Google Finance

Recently, however, the BDC sector has gotten cheaper with price declines carrying the Wells Fargo BDC ETN (BDCS) to an almost oversold position (36 RSI).

Source: Yahoo Finance

The main fear prompting the most recent dip is essentially the same as March’s. Namely that a double dip COVID-19 induced recession could cause numerous debt defaults among the middle market companies that BDC’s lend to.

This in fact might happen this winter, and frankly knowing whether it will is a key risk to all BDCs. Management teams may rate how many of their loans are currently in trouble, but there’s little ability for the analyst to second guess this judgment, nor do the risk ratings say as much about future loan viability as we’d like them to. For this reason, combined with the leveraged nature of BDCs, Cash Flow Kingdom decided to lower its risk rating on just about every BDC name it covered when COVID-19 first hit. We also placed the overall sector on hold, and have been pretty much sitting on the sidelines ever since.

We don’t deny everything will eventually be just fine, in fact we are generally some of the more optimistic people we know regarding the US getting past COVID-19. Further, we acknowledge if we can pick the right firm and time it decently, specific BDCs will end up being quite a bargain. The phrase, “Be Greedy when Others or Fearful” still applies. However, we contend first you need to