Goldman Sachs BDC (NYSE: GSBD) continues to offer an extremely compelling value proposition for passive income investors when considering BDC’s defensive portfolio positioning, high dividend coverage and solid credit/portfolio performance.
Although BDC’s portfolio Given that growth has slowed due to weak demand for new loan originations in a high interest rate environment, I think Goldman Sachs BDC’s net investment income is sufficient to ensure that the company pays a future dividend at its current rate of $0.45 per share.
My May article “Goldman Sachs BDC: 13.8% BDC Yield Is Not as Dangerous as It Looks” ended with a Buy rating, as did my March article: Goldman Sachs BDC: 11% Yield, Rising Rates, Small Amount premium NAV.
In March, GSBD shares fell sharply due to Silicon Valley Bank’s debacle (unfortunate timing: shares have fallen 10% since), a factor that has nothing to do with Goldman Sachs BDC’s portfolio performance. The Buy rating is based on BDC’s beneficial floating rate exposure in a rising rate environment and more attractive valuations in May.
Goldman Sachs BDC’s dividend has room to rise as the stock remains cheap (1% discount to NAV) due to a sharp improvement in its dividend coverage ratio in Q2 and concerns about the banking sector have receded. In my opinion, I’m now raising my classification to a Strong Buy.
GSBD is now my third largest BDC portfolio holding.
Goldman Sachs BDC’s Portfolio Growth Is Slower, But Still Growing
In my opinion, Goldman Sachs BDC is a higher quality BDC due to its large first lien focus and very solid dividend coverage. First lien debt has a first claim on the collateral put up by the borrower, so first lien debt is a less risky investment than second lien debt.
As of the end of the second quarter, 92% of BDC’s portfolio was invested in first-lien debt, while only 7% was allocated to other investments, primarily second-lien (5%). As has often happened in the past, Goldman Sachs BDC’s new investment commitment was made entirely in the first lien in the second quarter. All 100% loans are variable rate.
Like most BDCs, Goldman Sachs BDCs’ new investment commitments (loan originations) continued to decline in the first six months of 2022, driven by higher borrowing costs in a rising interest rate environment.
That said, Goldman Sachs BDC did issue $86 million worth of new first liens in the second quarter. In the first half of 2022, GSBD disbursed a total of $88.2 million in loans, compared to $497.5 million in the same period last year. This represents an 82% reduction in BDC origination. However, a reversal in the central bank’s interest rate policy could lead to a recovery in Goldman Sachs BDC’s net investment income in 2024.
Portfolio quality remains stable in Q2 2023
Goldman Sachs BDC had to make two more non-accrual loans in the second quarter, bringing the total number of non-performing loans to ten. On a fair value basis, the non-accrual ratio of the portfolio increased from 0.6% in 1Q23 to 0.8% in 2Q23, so overall portfolio quality remains healthy. I think a non-accrual ratio above 1.5% is something to be concerned about, and it’s only when the non-accrual ratio exceeds 2.0% that I start to worry (although it depends).
One of the BDCs I’ve been actively working on lately is TriplePoint Venture Growth BDC Corp. (TPVG) Although the increase in non-performing loans is well above the 2% non-accrual threshold mentioned here, it offers passive income investors a very competitive dividend coverage metric.
Dividend Coverage Improves QoQ
Goldman Sachs BDC’s second-quarter net investment income per share was $0.59, which equates to a dividend payout ratio of 131%. Goldman Sachs BDC has a dividend coverage ratio of 128% over the past 12 months, so I think the dividend is not only highly safe, but actually has room to grow.
Fair value could increase substantially
Goldman Sachs BDC is trading at 0.99 times NAV, and BDC reported a 1% increase in its NAV in Q2 2023. Given GSBD’s improved quarter-over-quarter dividend coverage, room for dividend growth, and only a slight deterioration in credit quality in Q2, I stand by my previous view that BDC could trade at a 20% premium to net asset value.
Why I Could Be Wrong About Goldman Sachs BDC
Goldman Sachs BDC has good portfolio quality and dividend coverage, which is enough for me to conclude that the dividend is fairly safe.
Having said that, in an environment of weak asset quality (recessionary), potential problems with credit quality may emerge gradually, and if the central bank reverses the interest rate cycle in 2024, Goldman Sachs BDC will face net investment income headwinds.
Goldman Sachs BDC is actively taking advantage of rising interest rates (100% of investments are floating rate), and compression of net investment income may impact BDC’s dividend coverage going forward.
Goldman Sachs BDC is a well-managed BDC with an amazing 13% dividend yield. Over the past 12 months, without exception, this payout has been covered by net investment income.
Goldman Sachs BDC stands out not only because of its good dividend coverage, but also because BDC has a very high allocation of funds invested in first-liens, which provide a degree of portfolio protection in a weak economy.
As long as credit quality remains below 1.5%, I feel confident recommending Goldman Sachs BDC to passive income investors.
Besides TPVG, GSBD is now one of the largest BDC holdings in my portfolio.