Mercer Capital's Financial Reporting Blog

W(h)ither Yields? Dividend Capacity & BDC Stock Prices: A Mortgage REIT Case Study

Does a dividend cut automatically equal a drop in stock price? It ultimately depends on risk-adjusted returns available to investors from other asset classes.

In a new whitepaper from Mercer Capital, Travis Harms and Jeff Davis examine the dividend-paying capacity of BDC stocks and the implications of reduced dividends on stock prices. Business development companies are an important and growing source of funding for middle market companies. Along with private equity and other investment funds, BDCs provide billions of dollars of investment capital to private companies in every segment of the economy. The authors also recently attended the 2014 BDC Roundtable, an annual gathering of BDC management teams, investment bankers, valuation firms, and accounting and tax experts.

The following abstract is taken directly from the whitepaper:

“The sustained low yield environment is pressuring BDC earnings. If business development companies implement modest dividend cuts, will stock prices decline to maintain investor yield, or will investors accept lower stock yields amid a dearth of compelling alternative income plays? The experience of mortgage REITs examined in this whitepaper, published September, 2014, suggests that erosion of NAV per share from credit-related writedowns is a bigger threat to stock prices over time.”

For over thirty years, Mercer Capital has met the valuation needs of the same middle market companies to which BDCs and other funds provide capital. Mercer Capital’s senior valuation professionals bring broad and deep experience to the range of valuation needs faced by BDCs and other investment funds, including ongoing fair value measurement and review for portfolio investments. Contact a Mercer Capital professional to discuss your needs in confidence.

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Mercer Capital monitors the latest financial reporting news relevant to CFOs and financial managers. The Financial Reporting Blog is updated weekly. Follow us on Twitter at @MercerFairValue.