Oxford Square Capital Stock: 14%-Yield Alternative Bank Pays Monthly
March 7, 2024
Why OXSQ Stock Is Bullish in 2024
The U.S. inflation rate currently stands around 3.09%, down from 3.35% in December 2023 and 6.41% in January 2023. It’s also lower than the long-term average of 3.28%. (Source: “US Inflation Rate (I:USIR),” YCharts, last accessed March 5, 2024.)
That’s the good news for cash-strapped Americans. Interest rates, however, are a different story.
The Federal Reserve’s target rate has remained in the range of 5.25% to 5.5% since last summer. And while average Americans are looking forward to the first of a series of interest rate cuts sometime over the next few months, the central bank is probably in no hurry to cut its rates, given the current strength of the U.S. economy.
Still, analysts expect the Fed to cut its key lending rate, which influences other interest rates, by two quarter-points by the end of this year. That would take interest rates to the range of 4.75% to 5.25%.
That’s still pretty high, but cutting rates too quickly in this strong economic environment could reignite inflation, which could result in rate hikes again. And almost no one wants to see that.
Even when interest rate cuts come, the rates are expected to stay above their pre-pandemic levels for a long time. That’s not something the average American wants to hear.
One niche area of the market that’s designed to take full advantage of the current interest rate environment is business development companies (BDCs).
We at Income Investors have nicknamed these kinds of firms “alternative banks.” They operate much like traditional financial institutions, borrowing money at low interest rates and lending it out at higher interest rates, but they don’t have branches or ATMs.
And thanks to a quirk in U.S. tax law, these firms pay out some of the highest yields around.
Traditional financial outfits have to pay the government between $0.25 and $0.35 in taxes on each dollar they make in profit. Under federal guidelines, BDCs pay little or no corporate tax on their earnings. In exchange for this benefit, BDCs must distribute at least 90% of their ordinary taxable income to their shareholders.
That’s what makes Oxford Square Capital Corp (NASDAQ:OXSQ) such a compelling option in today’s economic environment.
The BDC invests in public and private companies. It invests in secured and unsecured senior debt, subordinated debt, junior subordinated debt, preferred stock, common stock, and syndicated bank loans. (Source: “Investor Presentation: Quarter Ended September 30, 2023,” Oxford Square Capital Corp, last accessed March 5, 2024.)
Its investment portfolio includes stakes in various industries, including structured finance, software, business services, health care, telecommunication services, diversified insurance, information technology (IT) consulting, utilities, and plastics manufacturing.
Oxford Square Capital Corp concentrates its investments on companies with annual revenues of less than $200.0 million and market capitalizations or enterprise values of less than $300.0 million. The firm invests between $5.0 and $30.0 million per transaction. It seeks to exit its investments within seven years.
High 3rd-Quarter Net Investment Income
For the third quarter ended September 30, 2023, Oxford Square Capital reported net asset value per share of $2.78, compared to $2.88 in the second quarter of 2023. (Source: “Oxford Square Capital Corp. Announces Net Asset Value and Selected Financial Results for the Quarter Ended September 30, 2023 and Declaration of Distributions,” Oxford Square Capital Corp, November 7, 2023.)
Its net investment in the third quarter of 2023 was $6.4 million, or $0.11 per share, down slightly from $6.7 million, or $0.13 per share, in the second quarter of 2023.
The BDC’s total investment income in the third quarter was $13.0 million, compared to $13.5 million in the previous quarter. Of that, Oxford Square Capital Corp recorded $8.5 million from its debt investments, $4.1 million from its collateralized loan obligation investments, and $500,000 from other sources.
During the third quarter, the company didn’t make any new investments, but it received $16.1 million from sales and repayments of investments.
Monthly Distribution of $0.035 Per Share
Oxford Square Capital Corp’s high net investment income helps the BDC provide its shareholders with reliable dividends. As of this writing, the company pays a monthly distribution of $0.035 per unit, for a yield of 13.6%.
The good times are going to continue. Last November, the company’s board announced dividends of $0.035 per unit for the first three months of 2024. (Source: Ibid.)
Oxford Square Capital Stock Up 13% Since November
The stocks of the best alternative banks got a lot more interesting in early November. That’s when the Federal Reserve said it would keep interest rates between 5.25% and 5.5%.
The Fed didn’t rule out further rate hikes, but with inflation falling, Wall Street analysts are pretty confident that the Fed is done raising its rates for this cycle. The big question is when the first interest rate cut will come.
A pause in interest rate hikes and the lowering of inflation means the U.S. economy is expected to avoid a recession. A stronger economy means many small and medium-sized businesses will be looking to BDCs like Oxford Square Capital Corp for additional capital to help them expand. That should be good for OXSQ stockholders.
Currently trading at its highest level since August 2021, Oxford Square Capital stock is up by 11.8% year-to-date and 27% over the last nine months (as of this writing).
Chart courtesy of StockCharts.com
The Lowdown on Oxford Square Capital Corp
Industry tailwinds have made alternative bank stocks like OXSQ stock a great option for income-starved investors.
Not only does Oxford Square Capital Corp provide much-needed capital to public and private companies that are often overlooked by the big banks, but it also provides investors with reliable, high-yield monthly dividends and long-term capital appreciation.
While the Fed is most likely done raising interest rates for this cycle and is expected to cut its rates by at least 25 basis points this year, borrowing costs are expected to remain above pre-pandemic levels for years.
That’s bad news for people with credit card debt and mortgages, but good news for BDCs like Oxford Square Capital Corp.
