Feb 11, 2025 3 min read HTGC

Hercules Capital : IQ 2025 Dividend Announced

Hercules Capital reports its latest dividends which we compare against historic and expected performance. We also use the opportunity to review the popular BDC's valuation and whether the high flying stock ia a Best Idea.

A Little Less

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February 11, 2025

Latest

Hercules Capital (HTGC) has just announced its distributions for the IVQ 2024 - a regular dividend of $0.40 per share and a "supplemental" of $0.07 - or $0.47 in all. (From our perspective, given that the ex-date is in February, this counts as a 2025 payout). The supplemental is one of four HTGC plans to pay out for a total of $0.28 across 2025.

Looking Back

In 2024 - as the Expected Return Table (ERT) shows, HTGC paid out $1.92 per share - a third year of bounteous dividends after paying out only $1.55 per share in 2021. The three year average annual payout from 2022-2024 is $1.93 a share.

Barely

BDC Best Ideas - which has given itself the unenviable task of projecting every BDC's 2025 payout because no one else volunteered for the job - is estimating HTGC will dividend out $1.90 per share in 2025. That would represent only a (1%) drop from 2024 and (2%) over the 3 year average - i.e. very little change. The annualized dividend - going by this latest announcement - comes to $1.88 per share - only (1%) below our estimate.

Undeterred

We're not even ready to concede $1.88 will be final payout - although its within our expectations. We can't help noticing that the analysts are currently projecting HTGC will generate recurring earnings of $2.00 per share in 2025 for a "coverage" of the expected payout is 105%. Then there's $0.94 per share in undistributed taxable income as of September 2024g to consider...

Conclusion

HTGC may have slightly reduced its quarterly payout but it's still possible the BDC will match or exceed the 2024 level or the 2022-2024 average payout this year. In any case, the difference in yield and returns is hardly significant. More important is to recognize that we seem to be right in projecting that HTGC is on its way to a fourth year of "robust" distributions in 2025.

Valuation

At the close on February 11, 2025, HTGC's stock price was $20.88, (4%) beneath its 52 week and all-time price high and trading at a 83% premium to book. If our 2025 payout prediction is right, the yield is 9.1% - one of only 8 BDCs projected to generate only a single digit yield. However, the 2025 dividend to NAVPS yield is 16.7% - the highest return on equity of any BDC we track. To round out the metrics, the price to 2025 projected earnings is 10.4x, on the high side for a BDC but not outrageously so. (Main Street Capital's PE is 15.1x). The total return on a book basis is 9.1%. (You can find all these metrics in the ERT).

Recommendation

💡

We have the highest regard for HTGC's and its long standing track record in the venture-debt segment. Over the last 5 years, the BDC's NAVPS has increased by 10% - the fifth best performance in our 41 - soon to be 42 - BDC coverage universe. Unfortunately, investors have cottoned on and kept the BDC's stock high for a long time and done very well. Using Seeking Alpha data, we can say that HTGC has been one of the top performers on a total return (stock price change and dividends received) basis over a 3, 5 and 10 year time frame. This for a BDC that lends to companies that are often not much more than ideas imbued with capital. However - and you must have known there would be a "however" -we are controversially projecting HTGC's NAVPS will only remain flat in 2025. Our research at the BDC Credit Reporter has increased our concern that some of the challenges facing the venture-debt industry in recent years might be - finally - rubbing off on HTGC. When you combine that projection and the low yield being generated because of HTGC's popularity, the pro-forma return of 9.1% is not mouth watering. We deem HTGC "too expensive" and as noted in the ERT, subject to "slight credit weakening". We could end up being wrong, but for the moment we won't be adding HTGC to our Best Ideas.

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