A Contrarian Opportunity with 17 Years of Dividends
Today’s focus pick is Oaktree Specialty Lending stock.
Tight lending restrictions often make it difficult for many companies and consumers to have access to capital.
Add in the current period of higher interest rates and it becomes even more problematic. This is where specialty finance companies can help those that are underserved by the traditional banks.
Take the case of Oaktree Specialty Lending Corp (NASDAQ:OCSL), which operates as a business development company (BDC) in the specialty finance space.
The company provides financing to companies that have limited access to capital. Its solutions consist of first- and second-lien loans, unsecured and mezzanine loans, and preferred equity.
Oaktree Specialty Lending targets companies that have strong business models and sound fundamentals. At the end of June, the company had $193.0 billion in assets under management. Operations are found in 23 cities and 17 countries. (Source: “Corporate Profile,” Oaktree Specialty Lending Corp, last accessed October 17, 2024.)
Success in the specialty finance business is contingent on making the right investments and generating steady income flow. This is used to pay the steady dividends that have been in place for 17 consecutive years.
But while Oaktree Specialty Lending has managed to pay regular dividends over time, OCSL stock generally hasn’t produced any significant capital appreciation.
At the current price of $16.46, Oaktree Specialty Lending stock hovers just above its 52-week low of $15.56 and well below its range high of $21.64, down 19.5% in 2024.
For the potential income investor, the attraction is collecting the nice dividend yield while hoping for the shares to rally.
Technically, Oaktree Specialty Lending stock is trading at around its 50-day moving average (MA) of $16.47. If it can hold, we could see OCSL stock move towards the 200-day MA at $18.71 and the 52-week high.
Chart courtesy of StockCharts.com
Steady Revenues & Profitability
Oaktree Specialty Lending reports in a fiscal year ending September 30. The analysis is based on the fiscal 2023. The fiscal 2024 results are expected in a few weeks.
The revenue picture shows growth in three straight years; it was especially strong coming out of the pandemic in fiscal 2020 when business activity picked up.
The company’s revenues increased 105.4% from fiscal 2019 to the record $346.1 million in fiscal 2023. The compound annual growth rate (CAGR) was a healthy 19.6% during this period.
| Fiscal Year | Revenues (Millions) | Growth |
| 2019 | $168.5 | N/A |
| 2020 | $129.2 | -23.3% |
| 2021 | $235.8 | 82.5% |
| 2022 | $279.7 | 18.6% |
| 2023 | $346.1 | 23.8% |
(Source: “Oaktree Specialty Lending Corporation,” MarketWatch, last accessed October 17, 2024.)
Looking ahead, analysts expect Oaktree Specialty Lending to report revenues of $385.7 million in fiscal 2024 and $390.4 million in fiscal 2025. (Source: “Oaktree Specialty Lending Corporation (OCSL),” Yahoo! Finance, last accessed October 17, 2024.)
The bottom line points to consistent generally accepted accounting principles (GAAP) profits. What is absent is the steady growth that I prefer to see, but that’s simply the nature of the specialty finance business.
Oaktree Specialty Lending managed record profitability emerging from the pandemic, before sinking in fiscal 2022. A positive note was the strong pickup in fiscal 2023.
| Fiscal Year | GAAP-Diluted EPS | Growth |
| 2019 | $2.69 | N/A |
| 2020 | $0.83 | -68.9% |
| 2021 | $4.39 | 425.9% |
| 2022 | $0.48 | -89.0% |
| 2023 | $1.63 | 238.1% |
(Source: MarketWatch, op. cit.)
On an adjusted basis, the bottom line results have been steady. Analysts expect $2.23 per diluted share in fiscal 2024 and $2.22 per diluted share in fiscal 2026. (Source: Yahoo! Finance, op. cit.)
Moving to the funds statement, Oaktree Specialty Lending delivered positive free cash flow (FCF) in four of the last five fiscal years. The positive FCF and profits support the dividends.
| Fiscal Year | FCF (Millions) | Growth |
| 2019 | $87.5 | N/A |
| 2020 | -$5.3 | -106.0% |
| 2021 | $97.5 | 1,951.9% |
| 2022 | $30.7 | -68.5% |
| 2023 | $58.9 | 91.9% |
(Source: MarketWatch, op. cit.)
The balance sheet is typical of what you would expect to see in a specialty finance company. At the end of June, total debt was $1.7 billion or roughly 1.16 times equity, which is manageable. (Source: Yahoo! Finance, op. cit.)
Steady Third-Quarter Results
Oaktree Specialty Lending reported total investment income (revenues) of $95.0 million in the fiscal third quarter, slightly higher than the comparative $94.0 million a year earlier. (Source: “Oaktree Specialty Lending Corporation Announces Third Fiscal Quarter 2024 Financial Results and Declares Quarterly Distribution of $0.55 Per Share,” Oaktree Specialty Lending Corp, August 1, 2024.)
The GAAP net investment income (earnings) came in at $44.6 million, or $0.54 per share, versus $0.52 per share a year earlier.
On an adjusted basis, net investment income was reported as $45.2 million, or $0.55 per share, compared to $44.7 million, or $0.56 per share in the previous year.
Oaktree Specialty Lending Stock: Key Goal Is Paying Dividends
Oaktree Specialty Lending stock has paid dividends in 17 consecutive years.
The dividend is primarily paid out from the company’s distributable (taxable) income. In cases when the total dividend is greater than the distributable income (payout ratio above 100%), Oaktree makes up the difference from its retained capital.
The Lowdown on Oaktree Specialty Lending Stock
Investing in Oaktree Specialty Lending stock is about receiving regular dividends with the potential for higher dividends and some share appreciation.
The specialty finance business can be full of uncertainty, but the company has delivered decent results so far. And with interest rates on the decline, this could trigger rising loan demand for Oaktree, which could result in higher income and dividends.