Why OBDC Stock Is Appealing Right Now
I like business development companies (BDCs), or what we like to call “alternative banks” at Income Investors. They allow everyday people to invest in private equity. These firms operate like traditional banks but provide capital to small and midsized private businesses—companies that are too small for large financial institutions.
Unlike private equity firms that want you to plunk down $1.0 million to invest in American businesses, you can take a similar position in an alternative bank like Blue Owl Capital Corp (NYSE:OBDC) for about $15.00 per share.
Admittedly, investing in small and midsized companies can be risky, but BDCs help offset this risk by charging higher interest rates. This benefits their shareholders because BDCs are legally obligated to distribute at least 90% of their taxable income to shareholders in the form of dividends, which often have ultra-high yields.
And thanks to the current interest rate environment, the outlook for BDCs is pretty robust. The long-term interest rates, which is what BDCs borrow at, remain strong. The short-term interest rates, which is what BDCs peg their floating-rate loans at, remain high too, which has helped boost their bottom lines.
The Federal Reserve is expected to cut its interest rates three times in 2024, but because of strong economic activity, the cuts might not be as aggressive as initially thought. Cutting rates too quickly could reignite inflation. So, a higher-for-longer interest rate environment isn’t out of the question.
That should help BDC stocks like Blue Owl Capital Corp stock continue to pay large quarterly dividends and occasional special dividends.
About Blue Owl Capital Corp
Blue Owl Capital Corp is a BDC that mainly provides direct lending to U.S. middle-market companies. It invests in companies with market leadership positions and highly recurring, often contractual, cash flows. (Source: “February 2024 Investor Presentation,” Blue Owl Capital Corp, last accessed March 27, 2024.)
Its current $12.7-billion portfolio includes 193 portfolio companies diversified across 29 industries, including Internet software and services (11.8% of the total portfolio), insurance (9.9%), food and beverage (7.7%), and asset-based lending and fund finance (6.7%).
The company has $165.0 billion in assets under management. By total assets, Blue Owl Capital Corp is the third-largest publicly traded BDC. Its portfolio predominantly consists of senior secured loans (82% of its asset mix). The vast majority of its debt financing, 97%, has floating rates.
Whereas some stock investors might be concerned about how BDCs like Blue Owl Capital will perform during market downturns or recessions, it’s important to remember that the firm makes its loans for five to seven years.
Moreover, according to Blue Owl Capital’s management, when the BDC makes its loans, it takes into consideration what could go wrong with the borrower and whether there’s going to be a recession during the period of the loan.
As a result, Blue Owl Capital Corp doesn’t make loans to companies that wouldn’t be able to withstand an economic downturn. This gives it the confidence that its portfolio will hold up during recessions. In fact, financing recession-resistant companies is what Blue Owl is known for.
Record-High Net Investment Income for 4th Consecutive Quarter
In February, Blue Owl Capital Corp reported excellent results for the fourth quarter of 2023.
Its fourth-quarter net investment income (NII) increased by 17.3% year-over-year to $411.2 million, or $0.51 per share. This represented the company’s fourth consecutive quarter of record-high NII. (Source: “Blue Owl Capital Corporation Reports Full Year Results and Fourth Quarter Net Investment Income Per Share of $0.51 and NAV Per Share of $15.45; Increases Quarterly Dividend,” Blue Owl Capital Corp, February 21, 2024.)
Also during the fourth quarter, Blue Owl Capital made total new investment commitments of $1.3 billion in 17 new portfolio companies and 14 existing portfolio companies. This was up from $500.2 million in the third quarter.
BDC’s net asset value (NAV) per share increased to $15.45 in the fourth quarter from $15.40 in the third quarter.
Commenting on the fourth-quarter results, Craig W. Packer, Blue Owl Capital Corp’s CEO, said, “OBDC achieved record NII for the fourth consecutive quarter and its highest NAV per share since inception in the fourth quarter. As a result of our strong earnings, OBDC earned a record 13.2% [Return on equity (ROE)] in the fourth quarter, translating to an annual ROE of 12.7%.” (Source: Ibid.)
In full-year 2023, the company’s NII increased to $1.6 billion from $1.2 billion in full-year 2022. In 2023, Blue Owl Capital made new investment commitments of $2.16 billion in 32 new portfolio companies and 34 existing portfolio companies. That compared to $1.77 billion in 2022.
Blue Owl Capital Corp Increased Quarterly Dividend & Paid Special Dividend
Thanks to its record-high NII, Blue Owl Capital was able to increase its quarterly dividend from $0.33 per share in October 2023 to $0.35 per share in January 2024. (Source: “Dividends,” Blue Owl Capital Corp, last accessed March 27, 2024.)
That works out to a yield of 10.75% (as of this writing).
In addition to its regular quarterly distributions, Blue Owl Capital Corp sometimes pays quarterly supplemental dividends that are calculated as 50% of the company’s NII in excess of its regular dividend. The BDC paid its first special dividend in December 2022.
Again, because of its record-high NII, Blue Owl Capital’s board was able to declare a supplemental dividend of $0.08 per share, which was paid in March 2024.
Therefore, the total dividends that the company paid in the first quarter of 2024 were $0.43 per share ($0.35 + $0.08).
The total dividends that OBDC stock paid in 2023, $1.57 per share, represented almost a 25% increase from the total dividends it paid in 2022.
Blue Owl Capital Corp Stock Hit New Record High
Blue Owl Capital’s dividend isn’t the only thing that’s been flying high; so too is its share price.
On March 26, OBDC stock hit a record intraday high of $15.55 per share and a record-high close of $15.53 per share. Trading at $15.25 per share as of this writing, Blue Owl Capital Corp stock is up by 37% over the last year and four percent year-to-date.
Chart courtesy of StockCharts.com
The Lowdown on Blue Owl Capital Corp
What’s not to like about Blue Owl Capital Corp? The company reported record-high NII for the fourth consecutive quarter and its highest-ever NAV per share. This allowed the BDC to raise its quarterly dividend and provide a supplemental dividend.
Even with the Federal Reserve pausing interest rate hikes, Blue Owl Capital Corp was able to report record results. And in a higher-for-longer interest rate environment, the company should continue to perform well and be able to pay growing regular dividends and special dividends.
Even when interest rates start coming down, they’re expected to fall more slowly than previously anticipated and stay higher than where they were before the COVID-19 pandemic.
All this bodes well for the future of OBDC stock.