Kohlberg Capital Corp (KCAP) Yields 13% Dividends, but Beware the Risks

Kohlberg Capital Corporation (KCAP) yields a mighty 14% in dividends. However, recent developments might put this payout in jeopardy.

For those dividend investors who have an appetite for risk and have not been put off the financial services sector by the global financial crisis, one stock to consider is Kohlberg Capital Corporation (KCAP).

The company, which provides asset management and structuring of financial loans, is currently offering investors a yield of 13%. KCAP's (KCAP) asset management business Katonah Debt Advisors has around $2 billion in assets under management and the firm shares a strategic relationship with private equity firm Kohlberg & Co which has about $3.5 billion in committed capital.

Kohlberg Capital (KCAP) provides debt financing to businesses which are earning between $7.5 million and $50 million per year, a market which they estimate is valued at around $200 billion per annum. Reporting second quarter results at the start of August, the company turned in a solid performance with net investment income for the six months ended June 30 at $2.9m, or $0.13 per share. Dividends were held at $0.17c for the first and second quarters. Net asset value per share of $9.20 for the second quarter was down from the $9.56 but still well above the $5.02 where the company is currently trading.

At the end of June, Kohlberg Capital (KCAP) had unrestricted cash and time deposits of approximately $12.8 million. Through the first half of 2010, the investment portfolio continued to perform well and the company’s investments have benefited from the general recovery in values of corporate debt as a result of improved economic conditions.

The risks associated with the company are fairly obvious, and the dividend yield at such a high percentage should concern the conservative investor. Apart from the risk associated with investing in a financial services business of this nature, KCAP (KCAP) also has legal claims against lending providers who they allege terminated their credit facility improperly.

The stock is trading so far below its net asset value and on such a high dividend yield for good reason: The company warned investors it could be forced to pay the remaining balance of the Facility (approximately $144 million as of July 31, 2010), which would adversely affect the Company's business, liquidity, financial condition and results of operations.

Investing in KCAP (KCAP) is a classic tradeoff between risk and reward. Investors have enjoyed a phenomenal dividend yield in recent history and there are few other investments which will yield this kind of returns, but with this kind of reward there is also associated risk that of which investors must be very cautious.

 

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Comments

  • RiskNoWitz

    August 18, 2010

    Hey Sean, I suggest, before you recommend this stock to your faithful followers, you look at the valuation of whats on their balance sheet. It may not be clear to the average investor, but they have massively inflated the carrying value of their assets, which is why they have 3 class action lawsuits against them and are being investigated by the SEC. I suspect this would have been valuable information to include in your recommendation as well. Just looking at the discount to NAV, is NOT any reason whatsoever to invest in a company like this!!!

  • Sean Riskowitz

    August 18, 2010

    Thank you for your comment.

    This is not a stock recommendation forum, but rather draws attention to high yielding dividend stocks. The investment decision is the reader's alone and at no point do I recommend any stocks I write about.

    Refer the last paragraph of the article:
    "Investing in KCAP (KCAP) is a classic tradeoff between risk and reward. Investors have enjoyed a phenomenal dividend yield in recent history and there are few other investments which will yield this kind of returns, but with this kind of reward there is also associated risk that of which investors must be very cautious."

  • KCAPTAIN

    August 18, 2010

    Sean - long time reader, first time commenter.

    I have to agree with the poster above. You state that the "Net asset value per share of $9.20 for the second quarter was down from the $9.56 but still well above the $5.02 where the company is currently trading." To link the stock price and NAV of a company that is being sued precicely for its inflated NAV is a bad idea. Not one of the better trade ideas I've seen on this site.

  • Sean Riskowitz

    August 19, 2010

    KCAPTAIN - thanks for your comment, which is much appreciated. I hope you will continue reading the site and finding useful information.
    The NAV of the company is stated and calculable in the SEC filings. However you look at it, audited financial results declare the NAV to be $9.20. Whether or not this is fraudulently misstated is beyond the scope of this article and site. The fact that the company being sued for an "inflated" NAV does is not a sufficient condition to declare that the NAV is, in fact, overstated.

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