Why Apollo Investment Corporation Belongs in Your Income Portfolio

Resilient underlying net investment income per share and a solid dividend yield make this BDC a no-brainer.

Jun 23, 2014 at 2:15PM

With strong industry tailwinds for business development companies, a solid net investment income per share performance throughout 2013, and a highly competitive dividend yield, Apollo Investment Corporation (NASDAQ:AINV) is an interesting high-yield income play for cash hungry investors.

The asset management business ranks fifth in terms of market capitalization in the BDC sector. With a market capitalization of approximately $2 billion, Apollo is about 40% the size of industry leader Ares Capital (NASDAQ:ARCC).

Similar to other business development companies, Apollo focuses on investing in domestic middle market companies, with a strong free cash flow profile, and annual revenue between $50 million and $2 billion. Since the company conducted its IPO in 2004, Apollo Investment has invested $13.1 billion in more than 290 companies.

Favorable industry dynamics
Business development companies experienced some strong tailwinds for their lending business model. Consolidation tendencies in the banking sector and an industrywide push for lower leverage played into the hands of BDCs over the last couple of years.

Many banks increased their risk profile from 2004 to 2007 by investing in riskier assets and taking on more leverage to drive yields. The bust of the housing market required large banks to shun highly risky (that is, highly illiquid) assets in order to stabilize their businesses.

With tightening bank credit and a reluctance to lend, business development companies filled the gap and provided crucial funds for loan starved middle market companies. And the industry dynamics only point toward further growth in the future.

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Source: Apollo Investment Corporation, Wells Fargo 2014 Specialty Finance Conference.

Solid investment performance underpinning dividend payments
When it comes to Apollo's investment performance, this BDC doesn't have to hide.

While GAAP earnings are naturally fluctuating for investment companies, Apollo's underlying net investment income per share stayed solidly above the $0.20 mark, which was required to cover its $0.20 quarterly cash dividend throughout 2013.

With a $0.20 quarterly dividend, Apollo Investment currently yields 9.60%, which compares favorably to the 8.60% for industry leader Ares Capital. 

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Source: Apollo Investment Corporation, Wells Fargo 2014 Specialty Finance Conference.

Insider transactions
Another reason you should pay attention to Apollo Investment is because insiders have recently bought shares. As the company reported on June 13, 2014, Gregory Hunt, Chief Financial Officer purchased a few thousand shares at an average price of $8.48.

Two other members of Apollo Investment Corporation's board of directors also purchased shares since the beginning of June.

Insider transactions should always be carefully monitored. Most of the time, officers and directors benefit from asymmetric information, meaning they usually are better informed than the average investor, who solely relies on public information for their investment decision making

As such, insider transactions can be interpreted as strong endorsements of the company's long-term value proposition.

Final assessment
Apollo Investment is a solid bet for investors, who seek recurring income from one of the largest BDCs in the market. With a record of achieving sustainable net investment income per share and a high dividend yield, Apollo Investment could be a pillar investment for your income portfolio.

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