Income is a big part of investors' returns. Stocks, mutual funds and fixed income ideas in this column are featured because they are relatively solid in their ability to pay dividends or interest. We're giving income investors a resource to start their research for investments that give better yields with lower risk.

November 27, 2009 - Apollo Investments Corp. (AINV-NASDAQ) is a business development company specializing in investments in middle market companies. The firm provides direct equity capital, mezzanine and senior secured loans, and subordinated debt and loans. It alsoseeks to invest in PIPES (Private Investment In Public Equities) transactions. The firm may also invest in public companies that are thinly traded and may acquire investments in the secondary market. It prefers to invest in warrants, makes equity co-investments, and may also invest in cash equivalents, U.S.government securities, high-quality debt investments that mature in one year or less, high-yield bonds, distressed debt, non-U.S. investments, or securities of public companies that are not thinly traded.

The top five industries, by a percentage of Apollo's portfolio are: Hotels & Gaming (6.6%); Financial Services (6.1%); Oil & Gas (5.5%); Education (4.9%); Business Services (4.3%). In 2008, U.S. companies were 90.9%
of the portfolio, Canada 1.8%, Western Europe 7.3%.

A couple of things to note right away. There was no dividend paid in the first quarter. Dividends had risen from $1.44 in 2005 to $1.87 in '06, then $2.06 in '07. Last year, they totaled $2.08. Then in the first quarter of this year, none. They were cut in half and paid again in the second quarter at the rate of 26 cents a share. Paid at 26 cents in the third quarter. And will be 28 cents in the fourth. If they stay at 28 cents, a full year of dividends would be $1.12, giving a yield of 11.7% on a $9.61 stock.

The second thing to note is that in March of this year, the stock traded at $1.99 a share. Probably something to do with the lack of a dividend payment. And the fact that the company lost $4.39 a share in all of 2008 (fiscal year ends in March). So this stock isn't for the faint of heart. It's volatile, and the dividend is not reliable.

Having said those things, there's plenty of good to find here. Earnings will be positive this year. Consensus from 12 analysts is for $1.34 a share, then $1.38 in 2011. The portfolio is improving, with net realized and unrealized gains about 37 cents of earnings in the fiscal second quarter. Two loans were added to the nonaccrual status portion of the portfolio bringing the total to 9% of the total portfolio's cost basis. There were no new loans made in the quarter but another $39 million was added from 6 existing companies. Asset sales and loan prepayments were $30 million. Management believes opportunities are improving as competition is waning, and borrowers are more optimistic.

Net income in the second quarter was 34 cents, above the 28 cents dividend payment. During August, the company sold almost 21 million new shares, raising $173 million. Management used the proceeds to pay down credit facility borrowings. This gives the company more flexibility in funding new loans, and reduces the need to sell assets at less than favorable prices to fund new opportunities. Currently the company has $902.31 million of debt or about 35% of capital.

More numbers: Market cap is $1.55 billion. Forward P/E is 7. Price to sales is 4.55. Price to book is .94. Book value is $10.28. Current ratio is .51. Beta is a very high 2.02. The range in the last 52 weeks was a low of $1.99 and a high of $10.54. There are 164.22 million shares outstanding. Insiders own less than 1%. Institutions have 51.3% of the stock.

As mentioned above, Apollo is best described as suitable for the aggressive income investor, almost an oxymoron. But there are some investors who understand the risks and rewards that Apollo represents and are willing to invest. While this stock isn't for everyone, it should be of interest for those willing to do the due diligence and discover the strengths and weaknesses on their own.

 Ted Allrich