It Pays 12% a Year and Costs Less Than What's in Its Vault. What's the Catch?
This American company has lent $2.5 billion to 349 businesses and gives almost all the interest back to shareholders: 12% a year. Its shares cost $8.60, while the assets behind them are worth $10.92. This year, it paid out exactly what it earned.
Key points
This year, the company paid shareholders $0.78 per share and earned exactly $0.78, not a cent more
The shares cost $8.60, while the assets behind them are worth $10.92 according to the books
The CFO openly said on the conference call what she would sacrifice first when trouble comes
On November 23, the company repays $350 million of debt at 3.3%; new borrowing will be significantly more expensive
Book value per share is falling for the third year in a row, and 18% of the portfolio earns no interest
A bank without branches that gives away everything it earns
Imagine a bank with no branches, no checking accounts, and no ATMs. It does just one thing: lends money to hundreds of mid-sized American companies you've never heard of, then sends almost all the interest from those loans to its shareholders. That's exactly how Barings BDC $BBDC works, and exactly why it offers a 12% annual dividend yield.
At first glance, it looks like a gift. The shares cost $8.60, while the assets behind them are worth $10.92 according to the books. The market seems to be discounting roughly a fifth of everything the company owns. And on top of that, it sends you more than a dollar in dividends every year.
But one detail doesn't fit the picture. This year, the company paid shareholders exactly what it earned. Not a cent more, not a cent set aside for reserves.
And then there's the line from the conference call that most investors missed. When an analyst asked whether the dividend would last, CFO Elizabeth Murray answered plainly: if credit problems emerge, the company will cut the dividend. It will protect its assets, not the payout.
Anyone buying the stock for its 12% yield is therefore betting that nothing goes wrong. But three specific factors are putting pressure on that dividend over the next twelve months, while three others are keeping it afloat. We'll examine them one by one and show you which figures in the results will tell you who's winning the race.