Summary

• Triangle Capital is a business development company that I would like to bring to the attention of my readers.
• The stock is right in the middle of its 52 week trading range.
• I talk about the dividend, sustainability and explain why the most recent earnings were an anomaly.

Triangle Capital (NYSE:TCAP ) is a business development company that I would like to bring to the attention of my readers. Until I was asked about them, I was not really aware of them. But they deserve some attention. The stock is trading in the middle of its 52 week range (figure 1), and despite trading at a significant premium to its net asset value, I think the stock is an attractive long-term buy for the dividend paying portion of one’s portfolio. I like that it is an internally managed company, versus externally. I feel like this means management, in general, is more vested in the outcome of the company. The company primarily focuses on mezzanine financing with equity components for lower middle market companies. On average the company invests anywhere from $5 million to $35 million at a time in a company to help finance acquisitions, buyouts, conduct recapitalizations and finance growth opportunities. Most companies it finances do about $20 million to $200 million in annual revenues. The company has offered many different financing structures to its partners, including subordinated debt with warrants, first and second lien loans as well as equity co-investments.

Figure 1. 52 Week Trading Range of Triangle Capital Corporation

(click to enlarge)

The dividend

I like the juicy dividend that this company pays. The key when investing in such a name is determining whether the dividend is sustainable. Ill go into detail about earnings in a moment but understanding the method Triangle Capital employs to pay its dividends is paramount. First, let me point out the most recent dividend announcement so that there are no surprises. On February 25, 2015, Triangle announced that its board of directors had declared cash dividends totaling $0.59 per share, consisting of a regular quarterly dividend of $0.54 per share and a special supplemental dividend of $0.05 per share. The regular quarterly dividend was the company’s 33 rd consecutive quarterly dividend since going public in February 2007. Here is the deal. Triangle Capital wants try to pay shareholders an additional $0.05 per share on a quarterly basis for at least the next three years, which it started in 2014. The supplemental dividends are expected to be declared and paid in connection with, and in addition to, Triangle’s regular quarterly dividends. What this does is provide the company flexibility. It can keep its regular dividend going, or perhaps raise it, and pay any spillover as a supplemental dividend. If things go awry, it would not have to worry about a cut. I like this approach. But is the company covering its dividends?

Income

The company had a strong quarter. Total investment income during Q4 2014 was $30.7 million, compared to total investment income of $22.0 million for the fourth quarter of 2013, representing phenomenal growth of 39.4%. This increase was due to a sizable year-over-year increase in the investment portfolio as well as an increase in non-recurring fee and dividend income of $3.5 million from December 31, 2013 to December 31, 2014. This source of income can be somewhat volatile and unpredictable, but it paid off. Net investment income during the fourth quarter of 2014 was $18.1 million, compared to net investment income of $13.2 million for the fourth quarter of 2013, representing an increase of 36.7%. Q4 net investment income per share during was $0.55 compared to $0.48 per share during the Q4 2013. This was enough to cover the regular dividend of $0.54 but not when combined with the $0.05. I also have to say that the non-recurring income the company sees from its dividends received was responsible for about $0.08 this quarter. So to be clear, this level of income will not happen every quarter; net investment income is coming in under the dividends paid out, although is covered by cash flows.

For the year the company, like all BDCs has experienced top line pressure from a flattening interest rate curve. The company started the year off a bit rough and as such did not look as impressive year-over-year as you would expect following the great Q4 news. Total investment income was $104.5 million in 2014, compared to total investment income of $101.0 million in 2013, representing an increase of 3.4%. Net investment income for 2014 was $62.0 million, compared to net investment income of $61.5 million during 2013, representing an increase of 0.8%. Net investment income per share during 2014 was $2.08 compared to $2.23 per share during 2013.

Premium-to-book and cash position

The company’s net asset value per share at December 31, 2014, was $16.11 gained a single penny for the entire year versus the $16.10 at the end of 2013. Thus at $23.97 the shares trade at a 49% premium-to-book. This premium stems from the growth the company has displayed in addition to the company growing its dividends. The Street is valuing the company like this as it believes this growth will continue.

The company has a strong balance sheet as well, strengthening in particular in Q4. By issuing additional equity and long-term fixed-rate debt to fund its growing investment portfolio. Triangle now has approximately $265 million of available liquidity to support new investment opportunities in 2015. There are cash and cash equivalents totaling $78.8 million and another $102.4 million of available borrowing capacity under its $165.0 million senior credit facility.

Take home message

Triangle Capital is a premium BDC. It is growing its portfolio and has committed to paying not only a regular dividend but a supplemental dividend for the next few years. While net investment income alone may not cover in full the distributions, the company has significant cash flows and can pay its dividends. I want to point out that the incredible bump in net investment income this last quarter was a bit of an anomaly, given the non-recurring dividends it earned. In other words, expect it on average to be around $0.48-$0.49 based on the current portfolio. All things considered, I like this company and think the stock is set to move higher.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More. ) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.