2023-11-13 19:47:35 ET
Summary
- Goldman Sachs BDC is a good investment for retail investors with a low-risk tolerance, offering a 12.3% dividend yield and a 6.45 PE ratio.
- GSBD's stock price has been climbing; momentum and growth are improving, and the stability of its dividend is expected to continue.
- GSBD's focus on lending to U.S.-based middle-market businesses with secured debt makes it an attractive opportunity, with the potential for the share price to increase.
Slow Climb With Low Risk
Now is a good time to park extra cash retail investors might have into Goldman Sachs BDC ( GSBD ). Management has a solid plan and is sticking to it. For those who sport a high-risk tolerance for investing in individual stocks, we recently wrote about six with risk/reward opportunities. More conservative investors, uncertain about the stock market’s future from all the prater , ought to capitalize on the GSBD 12.3% dividend yield, 6.45 PE, and Seeking Alpha’s high grades.
Quant Rating & Factor Grades (Seeking Alpha)
The SA Quant Rating shifted the last two days of trading in the first week of November from Buy to Hold, as the share price climbed from $13.69 on October 31 ’23 to $14.63 on November 10 and 12. Since last July, the stock’s momentum and growth improved. It garnered SA grades from C- to B and C to B+, respectively. The stability of the dividend has remained constant for the last 6 months, and we do not foresee any substantial threats to the dividend.
Dividend Grades Over 6 Months (Seeking Alpha)
Handsome Profile
Goldman Sachs BDC, Inc. lends to U.S.-based middle-market businesses. Generating income and capital appreciation are its objectives. Borrowers must provide secured debt with first and second liens. In the past, management made unsecured loans to firms and for mezzanine debt “to a lesser extent.” That changed in recent quarters.
The shares are -7.55% over the last 12 months but +4.7% YTD. We see GSBD as a potentially attractive opportunity in these uncertain times; the company has paid a dividend for nearly 10 sequential years. The cash payout ratio of +55% to shareholders is covered by cash flows. The improving EPS, which we anticipate will grow by 13% annually, is going to underpin coverage of the dividends.
In difficult economic times, through the pandemic years, high inflation, supply chain caused slowdowns, etc., GSBD offered investors a higher-than-average dividend yield: 2019-8.7%; 2020-8.5%; 2021-9.8%; and 2022-9.4%. In terms of potential growth, GSBD earnings have been growing +20% on average annually in comparison to the Capital Markets industry growth rate slightly higher than 12%. We feel reassured management is going to proceed with an "abundance of caution" talked about in the shareholder transcript per the CEO's near opening remarks.
We believe there is potential for the share price to move up to its 52-week high of over $16 per share. Momentum is growing stronger; for instance, in the course of writing this article, the SA Quant Rating originally assessed as a Hold popped to Strong Buy. The simple moving average for GSBD moved markedly higher in the past 10 days than the previous 50. Except for uncertainty about the overall economy, we do not foresee GSBD facing serious risks or downward price pressures.
In early November, the company released its Q3 earnings:
- Net investment income per share for Q3 was $0.67, an increase of 13.6% over Q3 ‘22’s $0.59.
- Net debt-to-equity ratio was 1.13x as of the end of September.
- GSBD's 137 investments in 38 industries were 97.5% senior secured debt, including 94.9% in first liens, a new high in percentages for GSBD. 45.6% of outstanding debt was previously in unsecured debt and 54.4% in secured debt.
- The company beat estimates of EPS in 8 of the last 9 quarters.
- Q4 ’23 estimates are forecast on average to be $0.59 compared to Q4 ’22 of $0.66 but for FY '23, we expect GSBD to earn about $2.22 per share near to or slightly lower than last year's figure.
A Safe Space in Uncertain Times
The S&P 500 is +15% YTD, while the DJI is +3.46% YTD but some analysts are cautiously optimistic. The economic news is fraught with uncertainty. In our opinion, the effects of inflation, energy prices, interest rates, and other issues are factored into the S&P 500 and DJI. So too are special events including the Russia-Ukraine war and Israel’s intentions to demilitarize Gaza and free the hostages. Investors remain flummoxed over U.S.-China relations whether there is a thaw or additional sanctions ahead, as SA analyst ACM Research’s Robert Castellano discusses at some length in his recent article . Consumer and investor edginess is a factor adding to uncertainty if there is going to be a market boom or bust .
Economists Liz Ann Sonders and Kevin Gordon argued last month that the persistent weakness in consumer confidence, since the pandemic, has “been offset by strength in actual spending.” Unclear signals from consumers about business expectations and less confidence in wage adjustments to keep pace with higher rents and food prices seem to us to work to the advantage of investors in Goldman Sachs BDC.
GSBD has a negligible short interest ratio. Its dividend, revenue, and earnings are stable and fairly predictable with no unsettling surprises in recent memory. The stock has a Beta of 1.12 suggesting investors move in and out of the stock more frequently, perhaps to park money until something else attracts them.
For business development companies, earnings are the engine to push up and pull down the share price. Revenue growth is strong, while anticipated earnings over the next few quarters are stable but not expected to be exhilarative.
Quarterly Earnings (NASDAQ.com)
Hedge funds have been increasing their shares since September ’21 and last quarter increased their holdings by ~215K shares after a sell-off between January and May this year. Insiders bought in May when the share price approached $14 each. News sentiment and analysts’ both are trending positive between Hold and Buy assessments.
Gross profit TTM is reported at $446M from $357.5M in December ’22. Operating income is last reported TTM at $367M compared to $312.5M last December. Cash from operations is the standout at $355M TTM versus $27.4M at the end of ’22 and ($~30M) to close ’21.
Takeaway
We are especially positive about GSBD because management plans to stick to the knitting, as stated by the CEO:
we continue to invest only in directly originated first lien senior secured debt with no participation in the secondary market for broadly syndicated loans. As our portfolio continues to evolve, we believe it's particularly important to proceed with an abundance of caution with new underwritings, as the economic cycle evolves over the next few quarters, while base interest rates are expected to remain higher for longer.
The results of the plan are reflected in the reliable dividend, stable earnings, improved gross profit, operating income, and cash from operations. Hedge funds and corporate insiders appear to be pleased, too. To us, the approach signals a near to risk-free stock for low-tolerance retail investors in these times of economic uncertainty.
For further details see:
Goldman Sachs BDC Is A Safe Bet In Uncertain Times