Trinity Capital (NASDAQ:TRIN) is among the top early-stage companies that have the potential to grow at multiple rates to achieve mid- or large-cap status. Its low-risk, high-return strategy can provide shareholders with strong and sustainable returns on time. Despite a slowdown in venture capital funding, demand for venture debt continues to grow as venture loans allow founders to raise funds without selling shares cheaply to venture capital. In addition to strong fundamentals, the company’s shares look cheap at current valuations. Additionally, the company’s mammoth dividend yield of over 9% makes it a good stock to buy and hold for the long term.
Trinity business model
Trinity Capital debuted on the NASDAQ in 2020 as a business development firm specializing in offering various types of fixed and floating risk debt to growth-stage companies. In addition to loans, it also offers equipment financing combined with equity and warrant investments. In addition to providing funding to startups, the company works closely with them to help them overcome challenges. Interest income and commission income are the two main sources of income for the subprime debt company.
Although the company’s portfolio is diversified across many industries and geographies, manufacturing accounts for a third of its holdings, followed by professional, scientific and technical services at 24% and information at 8%. Through the issuance of equipment loans to three publicly traded digital asset mining and hosting companies during the June quarter, the company also broadened its portfolio focus towards digital assets. The portfolio’s return trends are robust and Trinity Capital increased its earnings quarter over quarter. The effective yield of its portfolio hovered around 13.8% and its base yield reached 12.9%.
The Federal Reserve’s strategy of raising rates would have a positive effect on Trinity’s investment earnings as the company moved to floating rates instead of fixed rates. At the end of the June quarter, 64.4% of its loans were at variable rates, compared to 59.6% at the end of the previous quarter and 49.3% a year ago. In addition, the company also borrowed 63% of its debt at fixed rates. As a result, it should create a positive impact on net investment income of $4.1 million in 2022. Overall, the company’s portfolio appears to be well positioned to benefit from rising rates.
Trinity’s meteoric growth story is likely to continue
To capitalize on growing business opportunities and turn them into sizable profits, the venture capital firm has doubled its team over the past 10 quarters. In the June 2022 quarter, the company’s portfolio assets reached $1 billion for the first time, more than double the $500 million in its NASDAQ debut. Additionally, the company’s quarterly investment income increased from $10.9 million to $33.5 million over the past ten quarters and net investment income per share decreased from $0.24 to $0. $.5.
Besides the huge growth numbers over the last 10 quarters, the company’s fundamentals appear to be in good shape to continue its growth trajectory. Due to economic headwinds, the venture capital market slow motion in 2022, but it has created opportunities for venture debt companies as capital-hungry startups turn to venture debt to meet their needs. Trinity’s record first-half creations of $608 million also reflect this trend. Additionally, it invested a record $460 million in start-ups in the first half, nearly double the amount invested in 2021 when venture capital markets were at their peak. As a result, the fundamentals for venture debt look solid, which bodes well for Trinity’s growth prospects. The company’s decision to shift its loan portfolio to floating rates would also reduce volatility-related rate hikes.
For fiscal 2022, analysts expect it to earn $2.09 per share, down from $1.45 per share previously. The company’s earnings per share were $1.08 in the first half of 2022. Additionally, the company’s credit quality appears to be strong enough to support its growth plans. During the June quarter, the company issued common stock and increased its credit facility by $100 million, bringing its total capacity to $400 million. Most of its debt will mature by 2026, so there is no risk of short-term maturities.
The perfect time to buy long term
The dividend factor makes Trinity a good stock to buy and hold for long-term investors. Its dividend yield currently sits at around 9.38%, which is significantly higher than the S&P 500 average of 1.69%. A high return like this is currently only offered by a few financial and real estate companies. However, these sectors are sensitive to fluctuations in the economy and interest rates. Trinity’s dividends are completely safe thanks to its strong earnings growth potential. The graph above shows that the company has increased its dividends every quarter for the past 10 quarters. Additionally, it has offered additional dividends to shareholders over the past two quarters when many other dividend companies struggled to increase their dividends. Its latest quarterly dividend of $0.42 per share is fully covered by its earnings per share of $0.51. With earnings expectations over $2 per share, Trinity has more room to support its dividend growth over the next two quarters of this year.
Dividends alone are not a good investment unless accompanied by strong capital growth. For this, it is crucial to buy the stock at the right time. In the case of Trinity, the company’s shares are trading at a discount to its recent average and industry trends. With the recent fall in prices and growing earnings, valuations are becoming even more attractive. Its stock is currently trading at 7.7x forward earnings against the industry median of 10x and the S&P 500 futures price at 17.5x earnings. The stock also looks attractive based on a forward price-to-book ratio of 1.1 versus the industry average of 1.23.
Based on the Seeking Alpha Quantitative Rating System, Trinity received strong Buy ratings, with a Quantitative score of 4.8 out of 5. SA’s Quantitative Rating is based on five factors including valuations, momentum , revisions, profitability and growth. Trinity’s momentum rating is low as its shares have seen volatility due to broader market trends. Other than that, all four factors received excellent ratings, including valuations and profitability. A valuation rating indicates that the stock is trading at a reasonable price, while an A profitability rating implies that the outlook is high for share price gains and dividend stability.
When the real estate and financial sectors are struggling to sustain growth, Trinity can be a good stock to add to a portfolio. Since its NASDAQ debut, the company has seen significant growth and its future fundamentals suggest that this trend will continue. Despite a slowdown in venture capital funding activities, the dynamics of the venture debt market appear solid, as cash-hungry start-ups prefer loans instead of selling stakes at a discount. Overall, Trinity looks like a good stock to buy at current valuations for dividend and value investors.