The BDC industry is currently fairly valued on an absolute and relative basis, which has led to a positive bias on the sector given industry conditions, with selectivity as the key to outperformance, says Vernon C. Plack, CFA, Director of Research at BB&T Capital Markets.
“BDCs provide investors with a high-dividend-paying investment with growth potential that also gives access to the private debt and equity markets. However, they are not without risk, and we have seen volatility in these names like we have seen in other industries,” he said. “From our perspective, selecting the right BDCs is key.”
Plack names Ares Capital Corporation (ARCC) as a top pick in the BDC industry. He says Ares Capital has one of the best investment track records since going public in 2004, and it is best in class in terms of talent and infrastructure.
“We believe the company has available capital to continue to grow its portfolio, and as a result we believe we will continue to see both solid earnings and dividend growth. Additionally, we believe the stock is a compelling value today, selling just under net and yielding about 10%,” Plack said.