Oxford Square Capital Corp: Outlook for 14%-Yielding Alternative Bank Bullish
November 13, 2024
OXSQ Stock Up 13.6% in 2024
Business development companies (BDCs) like Oxford Square Capital Corp (NASDAQ:OXSQ) are popular among investors and small and medium-sized businesses (SMBs). These businesses love BDCs, or what we like to call “Alternative Banks” here at Income Investors, because they provide them with much-needed capital.
Why don’t they just go to the big banks for money?
Even though SMBs generate between $50.0 million and $100.0 million in annual revenue, they’re deemed too small for traditional financial institutions. That’s where Alternative Banks step in.
Investors, meanwhile, love BDCs because of a tax loophole that results in massive dividend yields. BDCs pay out little or no corporate tax on their earnings. In exchange for this benefit, the Alternative Banks have to legally pay out at least 90% of their income to investors as dividends.
It’s not uncommon to find BDCs with dividend yields of 10% to 15%—five times higher than what you’d earn from traditional bank stocks.
Won’t lower interest rates hurt the lending environment?
Not really. High interest rates are, of course, great for lenders. But if interest rates are too high, it can make borrowing too expensive. So, the current lower-interest-rate environment and solid outlook for the U.S. economy should result in BDCs issuing more debt, which should help boost their profits.
About Oxford Square Capital Corp
Oxford Square is a BDC that invests in both 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 June 30, 2024,” Oxford Square Capital Corp, November 5, 2023.)
The BDC concentrates its investments in companies having annual revenues of less than $200.0 million and a market capitalization or enterprise value of less than $300.0 million. Oxford invests between $5.0 million and $30.0 million per transaction. It seeks to exit each investment within seven years.
Oxford Square’s $252.1-million investment portfolio includes various industries, such as structured finance, software, business services, health care, telecommunication services, diversified insurance, information technology (IT) consulting, utilities, and plastics manufacturing.
Solid Third-Quarter Results
For the third quarter ended September 30, Oxford Square reported net asset value (NAV) per share of $2.35. This compares to second-quarter NAV of $2.43. (Source: “Oxford Square Capital Corp. Announces Net Asset Value and…,” Oxford Square Capital Corp, November 5, 2024.)
Net investment income was $6.2 million, or $0.10 per share, for the quarter, compared to $7.7 million, or $0.13 per share, for the quarter ended June 30, 2024. Total investment income for the quarter was $10.3 million, compared to approximately $11.4 million for the quarter ended June 30, 2024.
During the third quarter, Oxford Square recorded investment income from its portfolio as follows:
- $6.1 million from its debt investments
- $3.5 million from its collateralized loan obligation (CLO) equity investments
- $0.7 million from other income
During the third quarter, the BDC made investments of approximately $47.7 million and received approximately $27.9 million from sales and repayments of investments.
Monthly Distribution of $0.035 Per Share
As an Alternative Bank, Oxford Capital is good at making money, which means a reliable monthly distribution for shareholders. It currently pays a monthly dividend of $0.035 per unit, or $0.42 on an annual basis, for a forward dividend yield of 14.4%.
That ultra-high dividend yield is not an anomaly; it’s a number that shareholders have come to rely on. The company’s five-year average dividend yield is 15.14%.
OXSQ shareholders can look forward to more of the same. In November, Oxford declared a monthly distribution for January, February, and March 2025 of $0.035 per unit.
Oxford Square Capital Stock Trading Near Record Levels
In addition to having a reliable ultra-high yield distribution, Oxford Square Capital stock has also been having a solid year, hitting a 52-week high of $3.07 per share back in May. For the most part, OXSQ stock has been trading in a tight range since then, currently trading hands at $2.90 per share. This puts OXSQ up 13.9% in 2024 and 9.7% year over year.
Lower interest rates and momentum in the U.S. economy should help the stock trade higher over the coming quarters. This could result in OSXQ rallying to record levels. It last hit a record high of $3.30 per share back in February 2019.
Chart courtesy of StockCharts.com
The Lowdown on Oxford Square Capital Corp
The current lower-interest-rate environment and solid net income investment continue to make Oxford Square Capital Corp a great option for dividend hogs. And even with interest rates coming down, they’re still expected to remain above pre-2020 health crisis levels. In fact, the days of near-zero interest rates may be a thing of the past. That might not be something someone with a lot of credit card debt wants to hear, but it’s good news for a BDC like Oxford Square Capital.
