Critical Comparison: KCAP Financial (KCAP) & Golub Capital BDC (GBDC)

KCAP Financial (NASDAQ: KCAP) and Golub Capital BDC (NASDAQ:GBDC) are both small-cap finance companies, but which is the better business? We will contrast the two businesses based on the strength of their institutional ownership, dividends, analyst recommendations, profitability, earnings, valuation and risk.

Insider and Institutional Ownership

24.7% of KCAP Financial shares are owned by institutional investors. Comparatively, 38.5% of Golub Capital BDC shares are owned by institutional investors. 8.0% of KCAP Financial shares are owned by insiders. Comparatively, 2.4% of Golub Capital BDC shares are owned by insiders. Strong institutional ownership is an indication that endowments, large money managers and hedge funds believe a stock will outperform the market over the long term.

Profitability

This table compares KCAP Financial and Golub Capital BDC’s net margins, return on equity and return on assets.

Net Margins Return on Equity Return on Assets
KCAP Financial 6.71% 5.63% 3.35%
Golub Capital BDC 60.34% 7.92% 4.20%

Analyst Recommendations

This is a summary of current ratings for KCAP Financial and Golub Capital BDC, as provided by MarketBeat.com.

Sell Ratings Hold Ratings Buy Ratings Strong Buy Ratings Rating Score
KCAP Financial 0 2 0 0 2.00
Golub Capital BDC 0 1 1 0 2.50

KCAP Financial presently has a consensus target price of $3.00, suggesting a potential downside of 7.12%. Golub Capital BDC has a consensus target price of $20.50, suggesting a potential upside of 8.07%. Given Golub Capital BDC’s stronger consensus rating and higher possible upside, analysts clearly believe Golub Capital BDC is more favorable than KCAP Financial.

Volatility and Risk

KCAP Financial has a beta of 1.63, suggesting that its share price is 63% more volatile than the S&P 500. Comparatively, Golub Capital BDC has a beta of 0.63, suggesting that its share price is 37% less volatile than the S&P 500.

Dividends

KCAP Financial pays an annual dividend of $0.40 per share and has a dividend yield of 12.4%. Golub Capital BDC pays an annual dividend of $1.28 per share and has a dividend yield of 6.7%. KCAP Financial pays out 133.3% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Golub Capital BDC pays out 102.4% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Golub Capital BDC has increased its dividend for 2 consecutive years.

Earnings and Valuation

This table compares KCAP Financial and Golub Capital BDC’s top-line revenue, earnings per share and valuation.

Gross Revenue Price/Sales Ratio Net Income Earnings Per Share Price/Earnings Ratio
KCAP Financial $28.26 million 4.27 $3.38 million $0.30 10.77
Golub Capital BDC $137.76 million 8.26 $82.28 million $1.25 15.18

Golub Capital BDC has higher revenue and earnings than KCAP Financial. KCAP Financial is trading at a lower price-to-earnings ratio than Golub Capital BDC, indicating that it is currently the more affordable of the two stocks.

Summary

Golub Capital BDC beats KCAP Financial on 14 of the 17 factors compared between the two stocks.

About KCAP Financial

KCAP Financial, Inc. is a business development company specializing in investments in debt securities portfolio, asset manager affiliates, and CLO fund securities. The firm prefers to invest in senior secured term loans, mezzanine debt, and equity securities primarily in privately-held middle market, and buyout companies. It also invests in debt and subordinated securities issued by CLO Fund Securities. The firm also makes investments in CLO Fund Securities managed by asset managers. Its investments under CLO Fund Securities comprises of minority investment in the subordinated securities or preferred stock of CLO Funds raised and managed by firm's Asset Manager Affiliates. The firm also invests in other investments such as loans to larger, publicly-traded companies, high-yield bonds and distressed debt securities. It also invests in first and second lien term loans. The firm also prefers to invest in secured and unsecured subordinated debt. It also makes acquisitions in businesses complementary to the firm's business. It primarily invests in healthcare, cargo transport, manufacturing, real estate, educate, automotive, agriculture, aerospace/defence, packaging, electronics, finance, non-durable consumer, utilities, insurance, and food and beverage sectors. The firm typically invests $1 million to $20 million in its portfolio companies. It provides senior secured term loans from $2 million to $20 million maturing in five to seven years; second lien term loans from $5 million to $15 million maturing in six to eight years; senior unsecured loans $5 million to $23 million maturing in six to eight years; mezzanine loans from $5 million to $15 million maturing in seven to ten years; and equity investments from $1 to $5 million. The firm targets the companies with EBITDA between $7.5 million and $50 million. While investing in debt securities, it invests in those middle market firms with EBITDA between $10 million and $50 million and/or total debt between $25 million and $150 million. It invests in minority, and majority or control equity positions alongside its private equity sponsor partners. The firm invests through its own balance sheet. KCAP Financial, Inc. was founded in August 2006 and is based in New York, New York.

About Golub Capital BDC

Golub Capital BDC, Inc. is a business development company and operates as an externally managed closed-end non-diversified management investment company. It invests in debt and minority equity investments in middle-market companies that are, in most cases, sponsored by private equity investors. The company seeks to invest in the United States. It primarily invests in senior secured, one stop, unitranche, second lien, subordinated and mezzanine loans of middle-market companies, and warrants.

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