HRZN - 11%-Yielding Horizon Technology: A Smart Monthly Payer To Buy

2023-10-02 08:10:00 ET

Summary

• Horizon Technology Finance is a high-dividend monthly payer that has given shareholders strong total returns.
• It focuses on growth sectors and generates above-average investment yields.
• HRZN has a healthy balance sheet, carries plenty of spillover income, and has the potential for future accretive equity raises.

Monthly payers like Realty Income ( O ) and Main Street Capital ( MAIN ) have a special place in my portfolio since I can easily time my monthly payments (credit card bills, utilities, etc.) to after the dividends are paid. Getting paid monthly simply makes sense, and I wish all dividend-paying companies could do the same.

This brings me to the high-dividend monthly payer, Horizon Technology Finance ( HRZN ), which I last covered here back in March with a ‘Buy’ rating, noting its solid portfolio quality and well-covered dividend.

While the stock price has risen by just 2% since then, income investors are in BDCs like HRZN for the income, and it hasn’t disappointed. This is reflected by HRZN’s 7.7% total return since my last piece, nearly matching the 7.8% rise in the S&P 500 ( SPY ) over the same timeframe. In this piece, I revisit the company and discuss why HRZN remains a good Buy in the current environment, so let’s get started!

Why HRZN?

Horizon Technology Finance is one of just a handful of BDCs that focus on growth sectors like tech and life sciences, with Hercules Capital ( HTGC ) and TriplePoint Venture Growth ( TPVG ) being the other ones.

Like most other BDCs, HRZN has shown periods of outperformance and underperformance over the years, and thanks to the power of compounding dividends, it has outperformed both the S&P 500 ( SPY ) and VanEck BDC Income ETF over the past 5 years. Notably, HRZN has paid out $17.72 in cumulative distributions than its IPO price of $15 back in 2010.

Part of the reason for HRZN’s above-average returns is that it targets above-average yields on its debt investments. This is reflected by HRZN’s 15.8% TTM average debt portfolio yield, sitting higher than the ~12.5% BDC average. That’s because the emerging growth industries that HRZN invests in are perceived to be riskier than the market average. This requires a more specialized skillset, as HRZN is led by a senior leadership team with an average 20+ years’ experience in venture lending, including the CEO, who has over 35 years of lending experience, including 20+ in venture lending.

HRZN continues to benefit from a high interest rate environment, with its debt portfolio now yielding 16.3% on an annualized basis, which surpasses its TTM yield by 50 basis points. It’s also opportunistically grown its portfolio by 24% over the past 12 reported months by 24% to $715 million. Importantly, this was achieved in part due to equity raises at prices accretive to shareholders. As shown below, HRZN has traded at an average price of around $12 over the past 12 months, sitting above the current $11.07 NAV/share.

Moreover, liquidity events at HRZN’s portfolio companies (such as M&A) give it additional dry powder with which it can deploy to new investments at attractive yields. This includes 6 portfolio companies that were able to repay their debt to HRZN during Q2, contributing to HRZN’s $274 million in total investment capacity, equating to 38% of HRZN’s current active investment portfolio size.

Overall, HRZN carries a healthy balance sheet with a debt-to-equity ratio of 1.2x, sitting well under the 2.0x statutory limit. This, combined with the potential for future accretive equity raises, gives HRZN the runway to pursue growth in tech and life sciences, which is estimated to have a $26 billion addressable market. HRZN and its peers may have an outsized opportunity to capitalize on funding needs for this industry considering the pullback from regional banks due to heightened capital requirements.

Importantly for dividend investors, high interest rates have created plenty of buffer between HRZN’s NII/share (which was $0.54 during Q2) and its $0.33 quarterly dividend rate (paid in $0.11 monthly installments). It contributes to HRZN’s hefty spillover income, which stands at $1.02 per share. While HRZN raised its dividend by 10% late last year, the high spillover income leaves room for another raise this year and plenty of dividend visibility down the line.

Concerns around HRZN include the potential for a harder-than-expected economic landing considering the high interest rate environment with the Federal Reserve Chairman indicating that there will be one more rate hike by the end of the year. As such, HRZN could be put in a position to negotiate rates should they show signs of weakness. This risk is buffeted by HRZN’s portfolio quality, with just 1 investment on non-accrual and with 90% of its debt portfolio being rated at 3 or 4 (with 4 being the highest quality) as of the last reported quarter, up from 86% in the prior year period.

It's also worth noting that HRZN’s NAV/share has declined since 2022, as shown below. However, that is a reflection of a decline in the fair market value of investments as tech company valuations are more sensitive to interest rates than other sectors, rather than realized losses.

Lastly, HRZN remains reasonably priced at $11.88 with a 1.07x price-to-book value. As shown below, HRZN has historically traded at a premium to NAV due to its track record of value creation and above market-average investment yields. While the current pricing isn’t cheap, it’s far lower than where HRZN traded at in the 2021 to early 2022 timeframe, as shown below. For the reasons stated above, I believe HRZN deserves to trade at a slight premium to NAV, as it has plenty of runway to keep churning out its dividend, especially considering its high spillover income.

Investor Takeaway

HRZN remains a solid BDC choice due to its focus on growth industries like tech and life sciences, its experienced leadership team, and its ability to generate above-average yields on its investments.

While there are risks associated with HRZN’s high interest rate environment and potential for further economic slowdown, it has strong portfolio quality, spillover income, ample liquidity, and the ability to raise equity at accretive prices enabling it to continue pursuing growth opportunities.

HRZN may not be cheap at the current price, but I continue to view it as a 'Buy' considering its reasonable premium to NAV and strong forward visibility to continue funding its well-covered dividend.

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