Wednesday, November 20, 2024

This 10% Yielder Is STRONG!

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Is Hercules Capital's 10% Yield as Strong as It Looks?

Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Marc Lichtenfeld

Anytime I hear the name "Hercules," I immediately impersonate Eddie Murphy as Mama Klump saying "Hercules, Hercules!" in The Nutty Professor. It's an automatic response. My kids, appropriately, roll their eyes.

Investors in Hercules Capital (NYSE: HTGC) aren't rolling their eyes these days, though - not while they're getting paid a 10% yield.

Will they stay as proud of Hercules Capital as Mama Klump is of her boy?

Hercules Capital is a business development company, or BDC, that lends money to emerging companies, including...

  • Compass Pathways (Nasdaq: CMPS), a biotech firm that is headquartered in London and focuses on therapies for mental health
  • HighRoads, a health benefits management company located in Burlington, Massachusetts
  • ZeroFox, a Baltimore-based cybersecurity provider.

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When I examined Hercules Capital's dividend safety a year and a half ago, there were some serious issues. The company was paying out more cash in dividends than it was bringing in from running its business.

Today, the situation has improved greatly.

When we analyze a BDC's financials, the number we're most concerned with is net investment income, or NII. This is the money the company makes from investing its capital. (It's the equivalent of cash flow for a regular business that sells products and services.)

As you can see in the chart below, Hercules' NII was stagnant for a few years.

But now, that has changed, as NII has exploded higher and is forecast to rise again this year.

Chart: Hercules Is Getting Stronger and Stronger...
View larger image
 

However, just because NII is growing doesn't necessarily mean the company can afford its dividend.

Will Hercules Capital's business be as strong as its namesake and allow it to continue paying the dividend?

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