Should Investors Consider This High-Yield Stock?
Can a 15.72% dividend yield possibly be safe? Well, let’s find out.
In today’s market, investors looking for high-yield stocks often find themselves going through the list of master limited partnerships or mortgage real estate investment trusts. Oxford Lane Capital Corp (NASDAQ:OXLC), however, falls into neither of the two categories.
Headquartered in Greenwich, Connecticut, Oxford Lane Capital is a closed-end investment management company. With a quarterly dividend rate of $0.40 per share, the company offers an annual yield of 15.72%, making it one of the highest-yielding stocks trading on the NASDAQ.
With this kind of yield, you are likely wondering how the company can cover its distributions. So let’s take a look at its business.
Oxford Lane Capital invests something called “collateralized loan obligations,” or CLOs. These are securities backed by a pool of business loans. Oxford Lane Capital collects interest payments from its CLO investments and passes some of that cash to investors in the form of dividends.
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CLOs are often considered risky, because they tend to contain loans with lower credit ratings. But CLOs themselves also have two types of tranches: debt tranches and equity tranches. The difference between the two branches lies in the order of repayment: investors of debt CLOs have to be paid in full before any payment can be made to equity CLO investors. In other words, equity CLOs are even riskier.
There’s always a premium for taking more risk, and by investing in unrated equity CLOs, investors can earn much higher yields.
And that’s how Oxford Lane Capital makes money. As of September 30, 2017, equity CLOs made up 93% of the company’s total investment portfolio, while debt CLOs accounted for the remaining seven percent. (Source: “Investor Presentation – Quarter Ended September 30, 2017,” Oxford Lane Capital Corp, last accessed November 14, 2017.)
As you’d expect, the yields are quite impressive. The weighted average yield of Oxford Lane Capital’s CLO debt investments stood at 9.3% at the end of September. For its CLO equity investments, the yield was at a whopping 16.4%.
However, due to the risky nature of the business, Oxford Lane Capital isn’t known for dividend safety. Earlier this year, the company cut its payout by 33%, from $0.60 per share to $0.40 per share. (Source: “Dividends,” Oxford Lane Capital Corp, last accessed November 14, 2017.)
So, can the company at least cover its reduced dividend rate? Well, in the September quarter, Oxford Lane Capital generated core net investment income of $0.46 per share, which was more than its quarterly payout. (Source: “Oxford Lane Capital Corp. Announces Net Asset Value and Selected Financial Results as of September 30, 2017,” Oxford Lane Capital Corp, November 7, 2017.)
The thing is, though, the company’s financials have deteriorated significantly in recent quarters. Its core net investment income of $0.46 per share represented not only an 11.5% decline sequentially, but a massive 35.2% drop year-over-year. The company’s net asset value also decreased 4.6% from the previous quarter to $9.71 per share.
Bottom line: due to the risky nature of equity CLOs and the company’s declining financials, this 15.72% yielder may not be worth chasing.