(By Rich Bieglmeier) On Tuesday, February 5, 2013, KCAP Financial, Inc. (KCAP) completed a secondary offering for four million shares at $9.75 or roughly $40 million. It wasn't the only active day for the financial services company. Overall, KCAP finished our weekly accumulation screen as the number five most added as a percent of market-cap.
Kohlberg Capital Corporation (KCAP) is a private equity and venture capital firm specializing in mid-market, buyouts, and mezzanine investments. It focuses on mature and middle market companies. The firm structures its investments through senior debt, second lien debt, secured and unsecured subordinated debt, mezzanine debt, and equity. It invests in all sectors except cyclical industries. The firm invests equity in both minority and control transactions alongside other equity investors.
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KCAP's 10.80% current dividend yield is one of the most eye-catching benefits for shareholders in our view. The Company is treated as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986 as amended (the "Code"). To qualify as a RIC, the Company must, among other things, meet certain source-of-income and asset diversification requirements and distribute at least 90% of our net ordinary income and realized short-term capital gains in excess of realized net long-term capital losses, if any; which means if they have a profit, 90 cents on the dollar must be paid back to shareholders.
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The company has paid a quarterly dividend since March 15, 2007 ranging from as little as 17 cents a share to as much as 41 cents. Obviously, the company suffered during the financial crisis; however, KCAP's dividend didn't miss a quarter.
Things are fundamentally better today than during the subprime crisis. Research Analyst, Jasper Burch told Wall Street Transcript, "in an environment of lower risk, defaults are near historic lows under 2.5% for leveraged-loan defaults. The BDCs (Business Development Companies) are probably even better than that in their underlying portfolios, and you have a very strong pricing trend."
Earnings projections are also trending in the right direction. Wall Street sees $1.02 eps for 2013, up 17.24% from 2012's $0.87 per share. Meanwhile, KCAP trades at 9.85 times 2013's earnings' forecast, suggesting some price appreciation is possible for the stock price.
Relative to its peers, KCAP is fairly valued; although, Kohlberg Capital quarterly revenue growth outpaces peers. Against KCAP's history, it is trading near its five-year high on a price-to-book (P/B) value, at 1.33x book compared to the five-year average of 0.6934x book. In this case, P//B is probably one of if not the most important common metrics for BDCs.
Overall, dividend seeking investors might find KCAP Financial, Inc. (KCAP) dividend yield more than attractive. If Wall Street analysts are correct in their forecasts for the year ahead, there is a good chance for a payout increase in the next 12-18 months. The recent offering should also put an initial floor of support for shares at $9.75ish. After that, more support should emerge in the $9 range.