Has BlackRock Kelso Capital Become the Perfect Stock?
Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if BlackRock Kelso Capital (NAS: BKCC) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at BlackRock Kelso Capital.
Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
Growth | 5-Year Annual Revenue Growth > 15% | 19.5% | Pass |
1-Year Revenue Growth > 12% | 24.2% | Pass | |
Margins | Gross Margin > 35% | 100.0% | Pass |
Net Margin > 15% | 58.5% | Pass | |
Balance Sheet | Debt to Equity < 50% | 48.9% | Pass |
Current Ratio > 1.3 | 0.90 | Fail | |
Opportunities | Return on Equity > 15% | 11.0% | Fail |
Valuation | Normalized P/E < 20 | 14.82 | Pass |
Dividends | Current Yield > 2% | 11.2% | Pass |
5-Year Dividend Growth > 10% | (0.9%) | Fail | |
Total Score | 7 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at BlackRock Kelso Capital last year, the company has kept its seven-point score. Rising debt and a slowdown in dividend growth create some concerns, although revenue reversed a year-ago drop with a substantial gain.
BlackRock Kelso is a business development company that invests in start-up companies, providing mezzanine-level financing early in their development. The company went public in mid-2007, just in time to plunge during the financial crisis, although it has gained back much of the ground it lost in 2008 and early 2009.
As BlackRock Kelso's dividend yield shows, BDCs provide some amazing income opportunities. The larger Apollo Investment (NAS: AINV) and Prospect Capital (NAS: PSEC) both match up with yields in the 11% range, driven by the fact that like BlackRock Kelso, they are required to distribute the bulk of their income in order to maintain their favorable tax status. Even though BDCs cover different niches -- Prospect focuses on energy companies, while Apollo and BlackRock Kelso are more generalist in nature -- they largely share similar risks and rewards.
The biggest challenge a BDC can face is losing its dividend. That's what happened to American Capital (NAS: ACAS) , which had to cut its payout during the financial crisis, although it's starting to look at possibly reinstating the dividend soon. By contrast, BlackRock Kelso shows no signs of imminent dividend problems.
To keep improving, BlackRock Kelso needs to find ways to boost its equity returns. That in turn would send the dividend higher -- and even if its business model never allows it to get a perfect 10, BlackRock Kelso has the potential to deliver strong income and attractive total returns if it keeps making smart investments.
Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
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At the time thisarticle was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.
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