Evaluating Hercules Capital Stock for Purchase

Hercicules Capital (HTGC 0.63%) has been attracting attention from investors seeking passive income due to its high dividend payout of over 10% annually. The company, which invests in venture-backed start-ups, offers a unique opportunity for those looking to diversify their portfolio.

As a specialty non-bank lender, Hercules Capital focuses on fast-growing start-ups within the technology, life sciences and renewable energy sectors. Its status as a business development corporation (BDC) allows it to provide funding for these companies during their early stages of growth, offering private equity-type investments along with attractive dividends.

The large dividend payout is largely due to the company's tax structure. Most BDCs are registered investment companies (RIC), meaning they must distribute at least 90% of their income to investors in order to remain exempt from federal taxes.

A significant portion of Hercules' assets are structured with warrants, equity and options – an arrangement that enables the company to benefit from successful ventures it invests in. Since its inception, more than 250 portfolio companies have gone public through IPOs or were merged or acquired; some notable examples include Palantir Technologies, ChargePoint, FuelCell Energy and Lyft.

In terms of dividends alone based on recent data, the quarterly payment per share stands at $0.40 giving it a yield rate of approximately 8.4%. However, this figure increases when you consider supplemental dividends issued by the company which can fluctuate according to asset value changes. This combined approach results in an overall annual payout exceeding 10%.

Investing in BDC’s does carry inherent risk such as lending uncertainties tied up with small developing businesses alongside leverage utilized by them aiming towards boosting shareholder payouts. While good times see performance enhancement ,poor economic conditions magnify losses. One way we measure this is via debt-to-equity ratio. Hercules Capital scores well here too with ratio standing at just .075 compared against average BDC ratio of 1.08 hinting at a more conservative leverage approach than its peers.

A reassuring factor is that around 89% of Hercules's investments are in first-lien senior secured debt, which holds the highest priority claim on borrower assets in case of default or bankruptcy, making it safer than subordinate debts.

A key opportunity for Hercules Capital has arisen from the decrease in bank lending to small and medium-sized companies over recent decades. Data from Pitch Book shows banks' share of the middle market direct lending market plummeted from about 70% in 1994 to approximately 25% in 2022. Additionally, when Silicon Valley Bank failed last year leaving a void for venture capital start-ups needing financing, Hercules stepped up, growing its investment portfolio by nearly10%, and generating $304 million net investment income (NII), a substantial increase by 62%.

So, should you buy? Since its IPO back in2005, Hercules Capital has proven itself as a reliable dividend stock weathering multiple recession. The nature of business could expose it to volatility but if you have appetite for risk and looking for high upside potential alongside an impressive annual yield rate exceeding10%, Hercules Capital makes a strong candidate worth considering today.