J.P. Morgan’s High-Yield Business Development Companies to Buy Into Earnings

BDCs have become favored stocks for more aggressive income investors as they offer high payouts, some on a monthly basis, some quarterly. A new report from J.P. Morgan sees increasing originations of deals in the first half of the year, and also sees the BDCs as very well positioned for a rising interest rate environment. The firm also is keeping a very close eye on dividend coverage from its top stocks to buy, which now the analysts feel comfortable with.

Here are the top BDCs rated Overweight at J.P. Morgan. Investors should know BDCs are required to distribute 98% of income and capital gains to avoid paying a 4% excise tax.

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Apollo Investment Corp. (NASDAQ: AINV) will report earnings on Thursday. The company invests primarily in various forms of debt investments, including secured and unsecured loan investments and equity in private middle-market companies. Apollo may also invest in the securities of public companies and structured products and other investments such as collateralized loan obligations.

It seeks to provide private financing solutions for private companies that do not have access to the more traditional providers of credit. Investors are paid a 9.6% distribution. The J.P. Morgan price target is raised to $9 from $8.50. The Thomson/First Call consensus price target is $9.05. Shares closed Friday at $8.43.

Ares Capital Corp. (NASDAQ: ARCC) reports Tuesday morning before the open. Ares was able to trim some of its debt last month after it did a spot stock offering of 13.5 million shares priced a $16.99. The company’s portfolio yield has declined as it has focused on higher quality investments, a decision that bodes well for shareholders. Investors are paid an 8.8% distribution. The J.P. Morgan target is $18.50, and the consensus is at $18.77. Ares closed Friday at $16.73.

Fifth Street Finance Corp. (NASDAQ: FSC) is one of the better known BDC stocks covered by Wall Street. It will report earnings on Thursday before the market opens. Fifth Street is a specialty finance company that provides financing solutions in the form of floating rate senior secured loans to mid-sized companies, primarily in connection with investments by private equity sponsors.

With an investment objective to maximize its portfolio’s total return by generating current income from its debt investments while seeking to preserve its capital, the floating rate debt status will serve investors well as rates rise. Investors are paid a large 10.4% distribution. The J.P. Morgan price target is $9.50. The consensus target is higher at $10.38. The stock closed Friday at $9.65.

Solar Capital Ltd. (NASDAQ: SLRC) will release quarterly earnings after the market closes Monday. The company invests primarily in leveraged, middle market companies in the form of senior secured loans, mezzanine loans and equity securities. J.P. Morgan sees the company as very conservatively managed and may suit more risk-averse income portfolios. Investors are paid a 7.3% distribution. The J.P. Morgan price target is $22.50, and the consensus target is $23.42. The shares closed Friday at $19.81.

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BDCs are not appropriate for extremely conservative portfolios. However, in growth and income portfolios, they make a nice addition as total return vehicles. The J.P. Morgan stocks rated Overweight are among the more conservative ones in the sector.