Hercules Capital: A 9.6% Yield Plus Particular Dividend Kicker (NYSE:HTGC)

Hercules Capital (NYSE:HTGC) has achieved somewhat nicely since my final bullish take on it in November, giving buyers each a excessive yield and capital appreciation.

In actual fact, due to the ability of dividends and compounding, it is produced a 13% complete return over the previous 3+ months, far surpassing the 8% return of the S&P 500 (SPY) over the identical timeframe.

After the current earnings, I revisit the inventory and consider whether or not if it is at the moment a purchase or maintain, so let’s get began.

Why HTGC?

Hercules Capital is only one of a handful of enterprise improvement firms that is internally managed, and focuses on making loans and fairness investments in rising applied sciences and life sciences. In actual fact, it payments itself as “financing the expansion of tomorrow’s firms immediately”.

Since its inception in 2003, Hercules has deployed over $16 billion in funding capital throughout over 600 firms, and is in lots of instances, a lender of alternative for entrepreneurs and enterprise capital corporations searching for progress capital financing.

As I’ve famous in earlier articles, HTGC is in a candy spot within the present surroundings. That is as a result of its debt investments are benefitting from increased rates of interest charged to the debtors.

On the similar time, it is seeing robust demand as debtors have delayed exit occasions akin to IPOs and M&A on account of muted valuation, particularly within the tech sector. That is as a result of increased low cost charges scale back the worth of future money flows, on which many tech firms are valued, and this considerably reduces their internet current worth.

The robust demand surroundings is mirrored by HTGC lately closing out a report full-year 2022 with complete gross debt and fairness commitments of $3.1 billion. It was in a position to fund almost half of this quantity with $1.5 billion value of investments made final 12 months.

This resulted in a report full-year NII of $188 million, a rise of 25% YoY, and importantly that is translating to sturdy progress on a per share degree, with NII/share rising by 54% YoY to $0.47. True to its type, administration lately rewarded shareholders with one other enhance to its common dividend, this time elevating it by 8.3% to $0.39, and paying out the remainder of its fourth quarter earnings with an $0.08 particular dividend.

Wanting forward, HTGC is well-positioned with a conservatively managed portfolio, comprised of 80% first lien senior secured debt investments. Plus, of the 18% of its debt investments which are second lien senior secured, 95% of them give Hercules the suitable to purchase out the primary lien holder, thereby giving HTGC the choice to up-level its security ought to it so select.

Furthermore, HTGC ought to proceed to profit from rising rates of interest, as each the Financial institution of America (BAC) and Goldman Sachs (GS) anticipate three more U.S. charge hikes by the Federal Reserve this 12 months. HTGC is well-positioned to profit, as 95% of its debt funding portfolio are floating charge with rate of interest flooring.

Importantly, HTGC carries a powerful stability sheet with a 1:1 debt to fairness ratio, sitting far under the two:1 statutory restrict. It additionally has no debt maturities this 12 months, affording it the flexibility to be opportunistic and selective in elevating new capital, together with fairness capital.

Administration additionally took steps to spice up its liquidity submit quarter-end and sees sturdy personal fairness exercise in 2023, which bodes nicely the monetary well being of portfolio firms. This was famous throughout the current conference call:

We ended This autumn with robust liquidity of over $606 million. Subsequent to year-end, we signed a brand new letter of credit score settlement with SMBC, which gives for a letter of credit score facility of as much as $100 million. As well as, we amended and prolonged our MUFG led facility. The enterprise capital ecosystem completed 2022 with fundraising exercise at a report $163 billion and funding exercise at $238 billion in accordance with information gathered by PitchBook and the Nationwide Enterprise Capital Affiliation.

With the quantity of accessible capital to speculate at historic highs, we stay optimistic that enterprise capital exercise will speed up in 2023. Regardless of extra selectivity and valuation sensitivity from enterprise capital buyers, capital elevating throughout our portfolio remained robust all through 2022, with 58 firms or greater than half of our portfolio firms elevating over $5.6 billion of recent capital.

Admittedly, HTGC is not as low-cost because it was in numerous factors of 2022, but it surely’s value conserving in thoughts that HTGC has additionally gained scale and measurement since then. For internally-managed BDCs, that are usually extra value environment friendly, I usually have a look at valuation from a PE standpoint (utilizing NII as an alternative choice to earnings) somewhat than worth to guide.

On the present worth of $16.24, HTGC nonetheless sits under factors at which it traded within the first few months of 2022 and carries a fairly low ahead PE ratio of 8.8. Contemplating this and the common and particular dividends, HTGC might nonetheless produce moderately robust complete returns for shareholders within the close to time period.

Investor Takeaway

Hercules Capital has demonstrated robust efficiency for the reason that begin of 2022, with report full-year outcomes which have translated to spectacular per share progress and dividend will increase. HTGC’s portfolio can also be conservatively managed with largely first lien senior secured debt investments, giving it an added layer of security.

Wanting ahead, HTGC ought to proceed to profit from increased rates of interest on account of its largely floating charge debt investments and has the stability sheet capability to do opportunistic lending. Whereas HTGC is not as low-cost because it was final 12 months, it is nonetheless value a nibble at current given its excessive dividend and elevated scale.