Trinity Capital Stock: Buying 13.8% Dividend Yield From Venture Debt (NASDAQ:TRIN)

I’ve been buying more Trinity Capital (NASDAQ:TRIN) since the internally managed venture debt BDC last declared a quarterly cash dividend of $0.51 per share, this was a 2% increase from its prior quarter and $2.04 annualized for a 13.8% dividend yield. This hike came as the Fed gears to keep base interest rates at their 22-year high of 5.25% to 5.50% for most of 2024, against prior expectations of at least three rate cuts starting from the June meeting. The CME FedWatch Tool is now pricing in the chance of no rate cuts to exit 2024 at 27.16%, its highest level in over a year.

TRIN’s investment portfolio at the end of its recent fiscal 2024 first quarter had an aggregate fair value of $1.4 billion, comprised of $1 billion in secured loans, $277.6 million in equipment financings, and $75.5 million in equity and warrants. Net asset value is what’s important and this came in at $626.3 million, around $12.88 per share at the end of the first quarter. This unfortunately dipped by 31 cents sequentially following a $0.06 hit from an expansion of its outstanding share count and $0.26 from unrealized losses on its investment portfolio.

Critically, TRIN has hiked its base dividend for 13 consecutive quarters, essentially every quarter since it went public with the current dividend wrapped within a record net investment income of $25.2 million in the first quarter, around $0.54 per share. This means 106% dividend coverage or a 94.4% payout ratio. Bears would be right to flag that this payout ratio, above the 90% BDC watermark, does not provide a ton of depth for TRIN to maintain near-term base dividend hikes. However, the Fed looks set to preserve rates higher for longer and the US economy continues to defy the odds with an employment boom. The BDC also held undistributed income of $55 million, roughly $1.33 per share, at the end of the first quarter.

Underwriting Quality, Debt-To-Equity Ratio, And The 2025 Bonds

TRIN’s 7.00% Notes due 2025 (NASDAQ:TRINL) and the 7.875% Notes Due 2029 (NASDAQ:TRINZ) are public trading TRIN securities. Both are currently swapping hands a few cents above their $25 liquidation value per note with TRINL at $25.32 per note and TRINZ at $25.37 per note. However, with TRINL maturing on 1/16/2023, TRINZ forms the better buy with its 3/30/2026 maturity set to see its holders earn an income for longer. To be clear, TRINZ is only 5 cents more expensive than TRINL despite a markedly higher annual coupon that’s 87.5 basis points ahead.

TRIN originated $286.8 million of total new commitments and funded $242.7 million during the first quarter with $182.9 million of funded investments in eight new portfolio companies and $57.4 million of investments in 12 existing portfolio companies. This was set against principal repayments of $148.5 million but came with a 110 basis point dip in TRIN’s effective yield to 15.8% from 16.7% in the prior fourth quarter.

The BDC had secured loans to four portfolio companies and equipment financings to one portfolio company on non-accrual status at the end of the first quarter. These had a fair value of $30.4 million, around 2.4% of the BDC’s debt investment portfolio at fair value. This came as total debt investment with an investment risk rating of 3.0 to 5.0 at 25.8% at the end of the first quarter dipped sequentially from 26.2% in the prior fourth quarter.

However, investments in default at 0.4% of TRIN’s investment portfolio at the end of the first quarter materially improved sequentially from 2.7% following the January exit of crypto miner Core Scientific (CORZ) from bankruptcy. Overall, TRIN’s underwriting quality remains healthy with loans on non-accrual status remaining low and the broader risk rating of its portfolio still overwhelmingly within the realm of prudence.

This is as the BDC’s debt-to-equity ratio at 1.16x as of the end of the first quarter also sat below its summer 2023 peak and also well within a broadly prudent range. TRIN is up around 7% on a total return basis since my last coverage in November with BDCs experiencing continued strength on the Fed’s higher-for-longer rhetoric. TRIN has seen its PIK interest income spike to $4.1 million from $346,000 in the year-ago comp.

This jump could imply more near-term headwinds with the NAV dip a potential cause for bulls to pause. However, I like the safety of the large dividend yield and healthy leverage ratio and have been adding to my TRIN position to capture more of this yield.