Original Recommendation

TCG BDC, Inc.

TCG BDC, Inc. (CGBD)

our opinion

buy

current price

$14.98

target price

$17.30

market cap

$895M

div yield

10%

  • TCG BDC pays a $0.37 quarterly dividend and special dividend annually. The LTM dividend yield should exceed 10% this year.
  • Their portfolio is very balanced, limiting their exposure to risky assets that may default on their interest payments.

trade details

Today we’re recommending TCG BDC, Inc. The company’s name is an acronym formed from The Carlyle Group Business Development Corporation. If you’re not familiar with The Carlyle Group, let’s start with a brief overview of their business.

The Carlyle Group is a private equity firm managing $212 billion of assets. They’re one of the largest private equity firms in the world, and their assets have nearly tripled over the past decade. Their lending arm – which services many of their portfolio companies – is TCG BDC.

The primary purpose of TCG BDC (we’ll refer to them as “TCG”) is to leverage the equity investments of The Carlyle Group by providing loans to their portfolio companies. As of March 31, 2019, TCG had a portfolio of debt and equity investments totaling $2.16 billion – an increase of 9.6% from the previous quarter. The Net Asset Value per share was $17.30 at the end of Q1 ’19. Yes, we’re actually buying shares at a discount if purchased today.

While lending to middle market companies can be risky, roughly 68% of their portfolio is comprised of first lien debt. Below you’ll find an overview of their asset mix.

TCG generates revenue from interest and investment income. In Q1 2019, TCG collected $55.1 million in investment income. This represents a 16.5% increase over the previous year’s quarter, yet their share price has decreased by nearly 20% from last year’s high. It doesn’t make much sense.

Here’s why we really like TCG as an investment: the huge dividend yield. The company pays a regular dividend of $0.37 cents per share. At the current share price the dividend yield remains just over 10%. The company’s balance sheet is healthy, and we anticipate dividend increases over time.

The company is also committed to a $100 million share repurchase program. For a company with a market cap of only $895 million, they’ll buy back roughly 11% of the public float. In the first quarter, they purchased shares totaling $14.1 million at an average price of $14.70.

Why is this important? It’s simple. If TCG has $100 million to pay shareholders as a dividend, you’ll receive a higher dividend per share if there are fewer shares outstanding. As mentioned, TCG has consistently paid a quarterly dividend of $0.37 cents per share. However, in Q4 they’re known for paying a special dividend (in addition to the regular quarterly dividend) to shareholders. In Q4 ’17 and ’18, TCG paid a combined dividend of $0.49 and $0.57, respectively. We suspect the dividend is increasing due to this share repurchase program.

Here’s the best part – TCG just announced another $0.37 cent dividend. It’s record date is June 28, 2019, so you’ll receive a dividend payment if you own shares before the record date. If you buy 1,000 shares of the company, you’ll receive a $370 dividend.

TCG’s balance sheet is healthy, and we’re confident in their ability to pay consistent dividends. In fact, their annual special dividend should increase in the coming fourth quarter.

Recommendation
We recommend buying shares today up to $15 per share. We have a $17.30 price target (their current Net Asset Value per share). As mentioned in our write-up, owning shares prior to June 28, 2019 will guarantee your share of the dividend payout taking place on July 17, 2019.