Lower Rates to Benefit Sixth Street Specialty Lending
The Federal Reserve is expected to cut interest rates well into 2025 as the central bank looks to achieve a soft landing for the economy. The push to reduce interest rates should fuel the demand for financing loans and investment as carrying costs decline.
As a play on the expected tailwinds behind lower interest rates, take a look at Sixth Street Specialty Lending Inc (NYSE:TSLX).
The specialty finance company lends and invests in middle-market companies. These companies use the funds to drive organic growth, acquisitions, market or product expansion, and recapitalization.
According to Sixth Street Specialty Lending, 99.6% of its debt investments generate interest at floating rates. It uses the interest income to pay out dividends.
At the end of June, Sixth Street’s portfolio was valued at around $3.32 billion and comprised 105 companies and four structured credit investments. (Source: “Company Profile,” Sixth Street Specialty Lending Inc, last accessed September 17, 2024.)
Sixth Street Specialty stock has traded in a relatively narrow channel, between $19.02 and $22.35, over the past year to September 17. Currently hovering at $20.81, TSLX stock is above both its 50-day moving average (MA) of $20.57 and its 200-day MA of $20.14.
Moreover, Sixth Street Specialty stock chart is showing a golden cross, a bullish technical crossover when the 50-day MA is above the 200-day MA. This pattern suggests additional gains. Next up is the record $24.74 level, originally achieved in November 2021.
Chart courtesy of StockCharts.com
Steady Revenue Growth, Profits, & FCF
Sixth Street Specialty Lending grew its revenues 66.4% from 2019 to the record $421.1 million in 2023. It experienced growth in three of the last four years, including a stellar 36.6% in 2023. Revenues grew at a nice compound annual growth rate (CAGR) of 14.2% during this time period.
Going back to 2014, the company’s revenues grew in nine of the 10 years, with the exception of 2019.
| Fiscal Year | Revenues (Millions) | Growth |
| 2019 | $253.4 | N/A |
| 2020 | $266.9 | 5.3% |
| 2021 | $319.5 | 19.7% |
| 2022 | $323.7 | 1.3% |
| 2023 | $421.1 | 30.1% |
(Source: “Sixth Street Specialty Lending, Inc.,” MarketWatch, last accessed September 17, 2024.)
Looking ahead, the revenue growth rate is expected to slow. This could be due to the possibility of slowing in the economy.
Analysts estimate that Sixth Street will report higher revenues of $475.9 million in 2024, followed by a slight decline to $460.4 million in 2025. (Source: “Sixth Street Specialty Lending, Inc. (TSLX),” Yahoo! Finance, last accessed September 17, 2024.)
According to the bottom line, Sixth Street has been consistently delivering generally accepted accounting principles (GAAP) profitability, highlighted by growth in three of the last four years. Last year saw a major rebound in GAAP profits.
| Fiscal Year | GAAP-Diluted EPS | Growth |
| 2019 | $2.34 | N/A |
| 2020 | $2.65 | 13.3% |
| 2021 | $2.79 | 5.4% |
| 2022 | $1.38 | -50.5% |
| 2023 | $2.61 | 88.7% |
(Source: MarketWatch, op. cit.)
The company’s consistent profitability is expected to extend into the next two years.
Analysts expect Sixth Street Specialty to report an adjusted $2.30 per diluted share in 2024, compared to $2.36 per diluted share in 2023. This is expected to fall to $2.19 per diluted share in 2025. (Source: Yahoo! Finance, op. cit.)
The fund statement shows the delivery of steady positive free cash flow (FCF), including a record $192.0 million in 2023.
| Fiscal Year | FCF (Millions) | Growth |
| 2019 | $118.1 | N/A |
| 2020 | $136.0 | 15.1% |
| 2021 | $112.6 | -17.2% |
| 2022 | $71.8 | -36.2% |
| 2023 | $192.0 | 167.3% |
(Source: MarketWatch, op. cit.)
The key risk for Sixth Street Specialty is the $1.7 billion in total debt on the balance sheet and weak working capital at the end of June. (Source: Yahoo! Finance, op. cit.)
While the debt will need to be monitored, I don’t see any immediate issues at this time. The company’s GAAP net earnings have easily cover total interest in the last five straight years.
| Fiscal Year | Net Earnings (Millions) | Interest Expense (Millions) |
| 2019 | $154.6 | $49.1 |
| 2020 | $178.1 | $39.4 |
| 2021 | $211.8 | $50.9 |
| 2022 | $108.1 | $60.4 |
| 2023 | $222.0 | $104.5 |
(Source: MarketWatch, op. cit.)
Sixth Street Specialty Stock: Dividend Streak at 11 Years
Sixth Street’s forward yield of 10.12% is above the five-year average yield of 7.28%. The higher yield was due to share price weakness.
Over the past year to the September payment of $0.46 per share, Sixth Street Specialty stock paid out $2.11 per share in dividends.
The company’s dividend includes the main quarterly dividend, as well as a smaller dividend paid out roughly two weeks prior. For example, Sixth Street Specialty stock paid $0.06 per share in dividends on August 30, followed by $0.46 per share on September 16. Similar payments were also made in May and June, February and March, and November and December.
The Lowdown on Sixth Street Specialty Stock
Based on Sixth Street’s expected profitability and relatively high payout ratio of 89.0%, I don’t expect dividends to change much in 2025.
For now, investing in Sixth Street Specialty stock is about receiving regular dividends and the potential for some capital appreciation.