The best business development companies are performing spectacularly well, while the worst are down in the dumps. But don't expect activists to bail out the industry's laggards. With the median BDC trading at a mere 10% discount to book value, there just isn't enough profit potential to get activists excited about in 2017.
In this segment of Industry Focus: Financials, join The Motley Fool's Gaby Lapera and Jordan Wathen as they discuss why activist investors will stay out of BDCs in 2017 and why rising interest rates may not be the boon that investors expect in the year ahead.
A full transcript follows the video.
This podcast was recorded on Jan. 9, 2017.
Gaby Lapera: "There's more dispersion in performance."
Jordan Wathen: I think that's absolutely true. If you look on a price-to-book-value basis, the lowest priced BDC sells for one-seventh of the highest priced BDC on a price-to-book basis. I don't think there's any other way to say that definitely happened. The BDCs that are performing really well have traded really well, and the BDCs that have credit issues this year have just done terribly.
Lapera: Yeah. I looked at it, that means you get nine out of 12 correct, which is 75%. Cs are for degrees, so are Ds, but you know what? You definitely passed.
Wathen: (laughs) Did I pass? And, the important thing to remember, I want to point this out, is that a lot of these predictions, if you nail one, you'll nail another. I said this before the show, but if you predict that it's going to be a very cold winter and the price of heating oil is going to go up, then you're probably going to get both of them right or both of them wrong. Balance it out.
Lapera: Definitely. Do you have any predictions for next year? Er, this year?
Wathen: Generally, first of all, activism, I think, is on hold. The median BDC trades at a 10% discount to book, so there's not really enough meat there, not enough room to make some money if you get in and mix things up. Secondly, this is really more of a warning, you really need to be very careful about this idea that rising rates will be generally good for BDCs, and you'll get all these dividend increases. I think what will happen, and what we'll see, is that over time, rising rates will lead to higher income, but it'll offset would-be dividend cuts, rather than lead to increasing dividends to investors.