Dividend = $0.07 monthly = 10.6% current yield
Gladstone Capital (GLAD) seeks to provide high current income through investment in debt of established businesses that are family owned or held by LBO funds. Their IPO came in August of 2001. They have elected to be treated as a business development company and, for tax purposes, they are a regulated investment company. As such, they pay almost no corporate taxes and are required to pass through virtually all their income to their shareholders on an annual basis.
Like almost all financial companies, Gladstone suffered through the credit market turmoil and posted a loss of $1.08 /share in 2008. It is expected that fiscal Q4 (FYs end September 30) will show a $0.23 gain and that FY 2010 will come in at around $0.90 - $.092 /share in profits.
Here are their per share numbers as reported by Value Line:
FY.......... EPS ..... Div....... B/V ...... Avg. P/E ...... 52-wk Range
2002 ..... 0.75 .....0.81... 12.97 ....... 23.4x ..........14.50-19.50
2003 ..... 1.09 .....1.10... 12.97 ....... 16.6x ..........15.50-23.10
2004 ..... 1.02 .... 1.37... 13.50 ........ 21.2x ..........18.90-25.80
2005 ......1.33 .... 1.52... 13.41 ........ 17.7x ......... 19.80-26.50
2006 ......2.10 .... 1.64... 14.02 ........ 10.3x ......... 19.90-25.40
2007 ......1.13 .... 1.68... 14.97 ........ 20.1x ......... 17.00-24.80
2008 ... d1.08 .... 1.68... 12.89 ......... NMF ........... 4.70-19.90
If the consensus view for about $0.90 /share in year-ahead earnings is acurate then GLAD’s multiple is just under 8.8x. That’s extremely low compared with all historical levels. (See chart above for comparisons.)
Gladstone issued over six million new shares last year to firm up the balance sheet and they reduced the dividend to the current rate of $0.07 per month to bring it in line with distributable earnings. The current yield of 10.6% appears safe barring any further credit market craziness.
Book value was $11.86 /share as of June 30, putting today’s share price at a 33.4% discount to asset value.
Gladstone has applied for a Small Business Administration license that would give them access to funds on more favorable terms in both interest rates as well as maturities.
Overall, Gladstone offers risk tolerant investors good current income and a chance for significant capital gains. A rebound to even 10x FY 2010 projections would bring these shares back to at least $9.00 or 14% above last week’s close.
That’s a pretty conservative target as GLAD shares actually traded as high as $14.50 in each calendar year from 2001 right through 2008. They were over $10 earlier this month.
Anyone willing to limit upside to mitigate risk could consider selling March $10 calls for about $0.50 /share. That would cap best-case total return at about 37% for the six month period until expiration while offering about 6% extra of downside protection.
Disclosure: Author is long GLAD shares.
___________________
Dr. Paul Price: After college at The American University [BS - 1971] and dental school at University of Pennsylvania [DMD - 1977] Paul served as a dental officer in the United States Air Force both domestically and overseas in Turkey and England. As his student loans diminished he was seduced by the market. From casual investing, starting in 1977, he devoted more and more time to equity research. In 1987 he made a full-time career switch by joining Merrill Lynch. Over the next 13 years he also worked with A.G. Edwards, Wheat First [now Wachovia Securities], and Ferris, Baker Watts. Dr. Price had enough success to retire in October 2000 but continues to help friends and family with their investments. He continues to give occasional investment seminars for civic groups and business schools.
Rate This Article: |
  |