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 I have available to me (lack of historical portfolio weights), I believe that most of the decline in the 1Q20 dividend was due to portfolio rebalancing and not the coronavirus.

In my last BIZD article, I forecasted that BIZD would distribute $0.7112 in dividends in 2S20. Since this forecast, the number of companies in BIZD’s portfolio decreased from 26 to 25, and the portfolio weights were also adjusted. The managers from VanEck Vectors removed BlackRock Capital Investment Corporation (BKCC) from the BIZD portfolio.

According to my updated model, which considers each BDC held by BIZD and their weights in its portfolio, my 4Q20 dividend estimate increases from $0.3509 to $0.3622. My model requires me to forecast the quarterly dividends for all 25 BDCs in BIZD’s portfolio. This model doesn’t consider future portfolio weights, and it uses historical dividend distributions of the current BDCs in the portfolio.

Table 3 – BIZD’s Equity Risk

k – CAPM 10Y T BILL BETA MRP BDC RP
6.574% 0.69% 0.89 5.600% 0.900%

Source: Analyst’s estimates and public data

Compared to my last equity risk estimate of BIZD, BDC specific risks have decreased by 12.6 bps. Most of this risk reduction was the result of me reducing my BDC risk premium.

Figure 1 – ICE BofA CCC & Lower U.S. High Yield Index

Source: FRED

Many BDC companies use junk bond effective yields to discount the loans in their portfolio. Since April 27, junk bond yields have decreased by over six percentage points. I believe that this clearly demonstrates that BDC specific risks have decreased over the period.

Table 4 – Updated BIZD DDM

D0 g k GGM
$ 1.530 -4.33% 6.57% $ 13.42

Source: Analyst’s estimates

I am bullish on BIZD because it has a possible upside of 10.8% with a holding period of a year or less, giving it a possible alpha of 1.9% My target price for BIZD increased from $12.27 to 13.42 due to the information in this article. If a resurgence in the COVID-19 virus occurs, my estimates could be seriously affected.

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Disclosure: I am/we are long BIZD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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