TriplePoint Venture Growth: 17% Yield Now A Red Flag (NYSE:TPVG)

The 4Q-23 results of TriplePoint Venture Growth (NYSE:TPVG) were not well received by passive income investors as the business development company reported a larger-than-anticipated net asset value decline and a rather significant increase in its payout ratio. The latter particularly raises question about TriplePoint Venture Growth’s dividend sustainability in 2024.

I think that the BDC could potentially adjust its payout in the next couple of quarters and the dividend yield ballooning to 17% indicates that passive income investors are cognizant of this risk.

Consequently, I think that caution is warranted and I am modifying my stock classification for TriplePoint Venture Growth to Hold.

My Rating History

In November 2023, I increased my investment allocation to TriplePoint Venture Growth and made it the third-largest BDC in my passive income portfolio, primarily because the company offered a low payout ratio based on net investment income.

Unfortunately, the BDC reported a big drop in its net asset value in 4Q-23, related to investment losses, which is lowering the dividend safety margin substantially.

Portfolio Review, NAV Decline, Surge In Unrealized Losses

TriplePoint Venture Growth is a technology-oriented BDC which made a number of bad investments in the past that have now come back to hurt the BDC’s NAV. TriplePoint Venture Growth reported a rather shocking 22% decline in its net asset value last year, with the BDC concluding the 2023 financial year with a net asset value of only $9.21 per share.

TriplePoint Venture Growth’s decline in net asset value can be explained by a high number of failed debt investments that impacted results in 2023.

The BDC’s NII contracted 16% YoY in 4Q-23 to $17.3 million and TriplePoint Venture Growth recorded a (realized/unrealized) investment loss, net, of $46.1 million. This loss resulted in a net decrease in net assets of $28.8 million, or $0.79 per share.

The key issue with TriplePoint Venture Growth is that the company has an abnormally high non-accrual ratio which was 4.0% in the fourth quarter. Though the non-accrual ratio declined 1 percentage point compared to 3Q-23, the non-accrual situation is not ideal, to say the least, particularly not when compared against the non-performing ratios of other BDCs.

Ares Capital (ARCC), for instance, had a non-accrual ratio of only 0.6% in 4Q-23. Blue Owl Capital (OBDC) had a non-accrual ratio of 1.1% in 4Q-23. Both BDCs are regarded as higher-quality BDCs with better portfolio quality.

TPVG’s 17% Yield Probably Unsustainable

TriplePoint Venture Growth earned only $0.47 per share in NII in 4Q-23, down 19% YoY due to an underwhelming investment performance that has been reflected in a big jump in non-accruals in 2023. Based on the BDC’s fourth quarter’s NII results, TriplePoint Venture Growth paid out 85% of its NII.

The change in TriplePoint Venture Growth’s NII performance in 2023 (deteriorating credit quality) has been reflected in an 11-percentage point increase in the payout ratio in 4Q-23, which strongly suggests that a dividend cut could be on the cards in the coming quarters.

My personal prediction is that the BDC will pay the $0.40 per share dividend for one, maybe two quarters, and then adjust it to a more sustainable range of $0.30-0.35 per share.

Now Selling At NAV

TriplePoint Venture Growth’s stock price dropped like a hot potato after 4Q-23 earnings and appears to have bottomed around $9.00, but I am refraining from doubling down for now because I think that the risk of a dividend cut in the near term is real.

TriplePoint Venture Growth is selling at net asset value, thereby reversing a premium into a more neutral valuation. I think that TPVG is unlikely to re-rate higher in the near term, however, as passive income investors obviously have concerns about the dividend getting slashed in 2Q-23 or 3Q-23.

TriplePoint Venture Growth’s peers Horizon Technology (HRZN) and Hercules Capital, Inc. (HTGC) sell for premiums to their respective net asset values due to them offering passive income investors stronger portfolio quality.

Why The Investment Thesis Might Still Work Out

TriplePoint Venture Growth suffered a large decline in its NII in 4Q-23 due to more serious portfolio issues. If TriplePoint Venture Growth gets a grip on its loan quality issues and reverses its NII trend, then I see a path for the BDC to avoid a dividend cut.

With that said, I tend to be a bit more pessimistic now and think that TriplePoint Venture Growth will most likely have to adjust its payout lower in the near term.

My Conclusion

TriplePoint Venture Growth’s 17% dividend yield has unfortunately become a red flag after the company reported a substantial decrease in its net assets in the fourth quarter, driven by an increase in its underperforming investments.

As a consequence, the BDC has seen a rather substantial increase in its dividend payout ratio (to 85%) in the fourth quarter which lowers the margin of safety. I think that TriplePoint Venture Growth will want to look very carefully at its ability to sustain the $0.40 per share in the coming quarters. My guess is that the BDC will adjust its dividend to a range in the next couple of months.

Though TriplePoint Venture Growth is now valued at NAV, I think that the risk of a dividend adjustment to the downside is very real and I am modifying my stock classification to Hold.