Alternative Investments Offer Growth and High Dividend Yields
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Ever wish you could invest directly with Karen Finerman, the well-respected hedge fund manager and value investor on CNBC’s Fast Money?
While you can’t put your capital to work with Finerman unless you are a high-net worth investor, possibly a more attractive option is available through Golub Capital (NASDAQ: GBDC), a business development company that makes debt and minority equity investments. The namesake Golub Capital is operated by Lawrence Golub and his brother David, the former of which is Finerman’s husband.
This fascinating company has a market capitalization of approximately $600 million and provides greater than a 7.5% annual dividend yield. Furthermore, shares of the income-oriented company have modestly appreciated since Golub Capital went public in early 2010.
Golub Capital operates in three business segments: middle market lending, broadly syndicated loans, and opportunistic credit. Middle market refers to the size of businesses that fit between smaller companies (< $50M) and billion dollar companies ($1B+). The firm maintains $8 billion dollars under management and seeks to invest this capital, earning a return for shareholders.
Serving a Niche Between Banks and Public Debt Markets
Business is thriving at Golub Capital, as revenues have grown nearly 51% in the last 12 months while earnings have increased 28.4%. This is based on compiling SEC data from the company’s last four quarterly reports.
Middle market companies such as Golub are outperforming in the current lending environment where large banks are underserving would-be smaller clients; at the same time, these clients aren’t large enough to access the public debt markets to raise capital on their own.
The only answer is Golub Capital, or a competing middle-market lender. Golub has completed a number of recognizable deals during 2012, including $162 million in financing to Japanese restaurant connoisseur Benihana and $26 million to Massage Envy Spa.
Management is scheduled to release Q1 earnings on May 3 before the market open. Analysts expect the company to earn $0.31 per share and $19 million in revenue.
Readers shouldn’t be concerned about getting in front of the earnings release, as Golub Capital trades on its long-term investments and the share price shouldn’t move materially based on the upcoming announcement.
Giants in the Industry
In addition to smaller middle-market lenders, industry giants such Blackstone (NYSE: BX) are indicating a strong uptick in all forms of business. The company recently gained media attention when it failed to garner a successful bid to take personal computer giant Dell private. Blackstone, along with a consortium of investors, withdrew their bid as PC shipments dropped an unprecedented 14% during the January - March 2013 period. This resulted in Dell lowering its anticipating operating income to $3 billion from a previous $3.7 billion--a huge no-no for a private equity firm which is attempting to make a fair valuation on a moving target.
Blackstone is profiting from the recent SeaWorld IPO, a successful private equity investment.
In addition to it’s enormous PE division, Blackstone also invests billions in commercial real estate and credit operations. Wall Street is optimistic on the stock, as Morgan Stanley recently issued an “overweight” rating and $22 price target on ticker symbol BX.
Blackstone is not to be confused with its former child company BlackRock (NYSE: BLK), which operates mainly as a traditional investment manager.
On April 16, BlackRock reported first quarter earnings of $3.65 EPS and $2.45 billion in revenue. Assets under management increased 7% from the prior year to nearly 4 trillion dollars (i.e. $4,000 billion).
To be fair, BlackRock recently announced an entrance to the middle-market lending industry, thereby competing with Golub Capital as well as subsidiaries of Goldman Sachs and GE Capital. However, the size of BlackRock’s new venture is insignificant when compared to the size of its larger IM business.
Wall Street believes that BlackRock’s stock could reach $300 a share based on the increased AUM and fee-generating business. BlackRock also is the owner of iShares, the most popular flavor of exchange-traded funds (ETFs) available on the market today.
Both options offer good current income. Blackstone currently pays greater than a 4.5% yield, while BlackRock provides better than a 2.6% dividend.
Foolish Bottom Line
Middle-market lending is thriving, and I believe readers should consider a long-term investment in Golub Capital. The company is lead by a strong management team, growing capital base, and improving lending environment. Even better, the company maintains a Who’s Who list of Fortune 500 executives at its disposal to function in an advisory capacity and lend their expertise.
Furthermore, I do not see competitors lead by BlackRock, Goldman Sachs, and GE Capital becoming a threat to Golub, as the overall size of the middle market lending business is growing. The stock is appropriate for investors who have a need for current income, or any type of investor who seeks to diversify their portfolio in alternative investments.
Larger players BlackRock and Blackstone also offer attractive growth and solid dividend yields for lower-risk investors.
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John Macris has no position in any stocks mentioned. The Motley Fool recommends BlackRock. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!