Hercules Capital: Double your income with this 9% yield (NYSE: HTGC)


The market is up one day and down another, and you don’t know what it will do tomorrow. This is why I maintain a good sized exposure to dividend payers which can help cushion the effects of a downside pullback. market and increase returns in a bull market. That’s why I don’t care so much about falling markets because they provide better buying opportunities.

This brings me to Hercules Capital, Inc. (NYSE: HTGC), which impressed with strong results last quarter while giving a dividend increase as icing on the cake. In this article, I highlight what makes HTGC a great income stock to buy right now, so let’s get started.


Hercules Capital is a business development company (“BDC”) that focuses on emerging technologies and life sciences, and like its counterpart Main Street Capital (MAIN), it is one of the few to be managed in internal. Since its inception in 2003, Hercules has deployed $14.6 billion in investment capital in 590 companies and is, in many cases, a lender of choice for entrepreneurs and venture capitalists looking for growth capital financing.

It is typically the sole lender to its debt investment, with 74% of the debt portfolio made up of senior secured loans, and 23.6% of its remaining loans are junior loans, with Hercules retaining the right to redeem the holder of the first lien.

The company’s headquarters are located in the heart of Silicon Valley, Palo Alto, California. This puts HTGC in the heart of the action, close to many emerging technology and life science companies, as well as leading research institutions such as Stanford University and UC-Berkeley. This ease in conducting impromptu face-to-face engagements gives HTGC an advantage, even in today’s video conferencing environment.

HTGC just wrapped up a strong second quarter with record issuance of debt and equity commitments that stood at $1.04 billion, making it the first time in history that it topped $1 billion. dollars in a single quarter. This brings total creations in the first half to $1.66 billion, a record for the company. Meanwhile, HTGC’s portfolio companies delayed exit events such as IPOs and buyouts, resulting in low loan prepayments. This translated into a record $360 million growth in the investment portfolio net of debt in the first half of this year.

Additionally, HTGC generates a respectable 11.5% effective return on its debt portfolio and holds equity or warrant positions in 103 portfolio companies with a fair value of $165.7 million. While this is worth less than the base cost of $181.6 million, it has more to do with stock market volatility, which is driving down valuations of the growing state-owned companies in which HTGC invests. The loan portfolio appears to be in good shape, as only 1 new unrecognized loan was added during the second quarter, bringing the total of non-accruals to just 2 investments representing only 0.1% of the fair value of the portfolio.

As such, I am not concerned about the decline in the net asset value per share from $11.22 at the end of 2021 to $10.43 at present, as the net asset value per share should recover with a normalization of the tech valuations, whenever it happens. At the same time, HTGC is well positioned in a rising rate environment, as 94.9% of its debt portfolio is floating rate loans with interest rate floors.

Looking ahead, HTGC has plenty of dry powder to fund its deal pipeline, with $780 million in available liquidity and 101% regulatory leverage, well below the 200% limit. Additionally, the venture capital ecosystem appears healthy, as management pointed out during the conference call:

Thanks to the significant and timely efforts of our expanded finance team, we ended the second quarter with strong liquidity of $780 million, giving us broad coverage of our available unfunded commitments of $489 million and the ability to fund our ongoing planned business activity.

The venture capital ecosystem continued its strong pace in the first half of 2022, with fundraising activity of $121 billion and investing activity of $144 billion, according to data collected by PitchBook and the National. Venture Capital Association.

Importantly, Hercules recently increased its regular dividend by 6% to $0.35 per quarter and declared another special dividend of $0.15. Although the regular dividend is currently not covered by net investment income of $0.32 in the second quarter, I see potential for better coverage in future quarters as it funds its new creations. Additionally, HTGC has $1.18 per share in indirect earnings, which gives additional support to regular and special dividends.

While BDCs are typically measured on a Price-to-NAV basis, I believe internally managed ones with a strong track record of growth should be assessed on a Price-Bearings basis. At the current price of $15.91, HTGC is trading at a forward P/E of 11.9, which I find reasonable for a growing company.

Analysts on the sell side have a consensus buy rating with an average price target of $17.17. This translates to a potential total return of 17% over one year, including the regular dividend, and the continuation of special dividends should boost the total return.

Key takeaway for investors

Hercules Capital is a well-run, internally managed BDC with a solid track record of growth. It sees record levels of deal originations as tech companies delay liquidity release events due to market volatility, and sees healthy activity from private equity sponsors.

Although the net asset value per share has fallen since the end of last year, I consider this to be temporary due to falling technology valuations rather than signs of material weakness in its debt portfolio. Meanwhile, income investors receive a regular dividend yield of 8.8% with plenty of room for ongoing special bonus dividends. HTGC is a buy for income investors.

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