Hercules Capital Stock: This Double-Digit Yielder’s Muscles Are Sagging

A little over a year ago, I took a look at business development company (BDC) Hercules Capital Inc. (NYSE: HTGC). At the time, the dividend safety rating was “D.”

The most recently declared dividend is $0.39 per share, which comes out to a 10.5% yield. Hercules also pays a supplemental dividend, which was $0.08 per share last quarter, down from $0.15 in the fourth quarter of last year. Including the additional $0.08, the yield is 12.7%.

But can investors rely on that large of a dividend going forward?

The regular dividend is calculated using taxable income. The company pays out 90% to 100% of taxable income. But taxable income has noncash items and can be easily manipulated. So for BDCs, which lend money and invest in private companies, we use a measure of cash flow called net investment income (NII).

Last year, Hercules paid out $245 million in dividends while generating $188 million in NII. There is no estimate for this year’s NII, but it should be higher. Wall Street projects $250 million in dividend payments in 2023. While NII is likely to be higher, it is doubtful it will eclipse $250 million.

Hercules hasn’t cut the regular quarterly dividend since 2010. However, the supplemental dividend has been lowered as recently as March of this year.

If you’re looking at just the quarterly dividend, not including the supplemental payout, the risk of a cut is moderate. If you include the supplemental dividend, which increases the total amount paid by the company and includes recent cuts, the risk is high.

Dividend Safety Rating: C/D

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