Analyzing Oaktree Specialty Lending Corporation (OCSL)

Welcome to the fourth installment of my portfolio series, where I analyze all 31 stocks currently in my personal portfolio. Today, we’ll be taking a detailed look at Oaktree Specialty Lending Corporation, ticker OCSL.

My Holdings and Dividends

Logging into my Vanguard account, where I manage all my dividend investing, I currently own 253 shares of OCSL. Oaktree Specialty Lending pays quarterly dividends, with the most recent payment being 55 cents per share. Although they do not pay special dividends regularly, they issued a special dividend in January. With my current holdings, I receive approximately $139.26 in dividends each quarter. Breaking it down monthly, that comes to roughly $46.42 per month from Oaktree Specialty Lending.

About Oaktree Specialty Lending Corporation

Oaktree Specialty Lending Corporation is a specialty finance company dedicated to providing customized credit solutions to companies with limited access to public or syndicated capital markets. They seek to generate current income and capital appreciation by offering flexible and innovative financing solutions, including first and second lien loans, unsecured and mezzanine loans, and preferred equity. Oaktree invests in companies across various industries, typically focusing on those with resilient business models and strong underlying fundamentals.

Structured as a business development company (BDC), Oaktree was founded in 2007. According to Google, their stock currently offers a substantial dividend yield of approximately 11.7%. For nearly the last three years, this company has managed to grow its dividend almost every quarter. In March 2020, OCSL was paying 26 cents per share in dividends, and today, they pay 55 cents per share.

Reverse Stock Split

In January, Oaktree announced a reverse stock split, where every three shares of the stock were consolidated into one share. This move did not result in any loss of money or ownership percentage for shareholders, as the share price adjusted accordingly. Companies undertake reverse stock splits for various reasons. My theory is that OCSL did this to increase their share price and become more attractive to analysts. Some financial institutions will not rate a stock trading for less than ten dollars per share, and these ratings can significantly impact a stock’s performance. Unlike companies like Annaly Capital Management or Orchid Island Capital, which often perform reverse stock splits due to declining share prices, OCSL’s reverse split was not driven by poor performance.

Historical Context and Performance

Oaktree Specialty Lending has undergone significant changes since its inception. Initially, the company had its IPO in 2008 at around $11 per share, but its performance declined significantly starting in late 2012. Both share price and dividend distributions suffered until 2019 when Brookfield, a large Canadian asset manager, acquired a 61.2% stake in the company. Following Brookfield’s takeover in September 2019, OCSL’s share price rose by over 40% until the broader market downturn in 2022.

Despite the decline since their IPO, the involvement of Brookfield has reinvigorated the company. Although OCSL’s share price is still down about 49% from its IPO, Brookfield’s management has improved the company’s performance, alleviating concerns about owning this stock.

Investment Portfolio and Strategy

As of December 31st, OCSL had $2.6 billion in investments spread across various asset types, including first lien, second lien, unsecured debt, equity, and joint ventures. Their portfolio is diversified across 156 companies. OCSL aims to generate current income first, followed by capital appreciation, which is typical for most business development companies. They invest in non-sponsor companies with unique needs, complex business models, or specific challenges.

An impressive metric for OCSL is that none of their investments are on non-accrual status. This means that all the companies in which Oaktree Specialty is invested have been able to meet their debt obligations. This speaks to the management’s ability to select reliable borrowers. While other BDCs, like Al Rock, have a few non-accruals in their portfolios, OCSL’s clean record highlights their strong investment selection process.

Sector Diversification

OCSL’s investment portfolio is well diversified across different industries. Software constitutes a significant portion, at 16.5%, followed by IT services, financial services, and pharmaceuticals. They avoid riskier sectors, such as crypto, and do not heavily invest in cyclical industries like energy. According to their website, 87% of their portfolio consists of floating rate loans, which has allowed OCSL to benefit from rising interest rates by collecting more interest income during periods of high rates.

Recent Investments and Financial Highlights

Despite high interest rates, OCSL has continued to lend money actively. According to their latest investor presentation, they made 18 new investments in the fourth quarter of 2022. Seven investments were made in companies with ongoing relationships with Oaktree, while 11 companies successfully ended their partnership. Although their net asset value shrank by a considerable amount, this was mainly due to the special dividend issued. It was the first special dividend since Brookfield took over the company.

OCSL’s current dividend coverage is at 111%, which, while slightly down from the previous quarter, is still strong. For 11 consecutive quarters, Oaktree Specialty Lending has been able to grow its dividend distributions, demonstrating consistent performance. The growth varies from a few cents to less than a penny per quarter, but any growth is positive for high-yielding investments.

Insider Ownership and Management Confidence

Another notable aspect of OCSL is its high insider ownership percentage. According to Finviz, company insiders own 4.98% of all outstanding shares, which is higher than average compared to other BDCs like Ares Capital, Main Street Capital, and Al Rock. High insider ownership is a good sign that the board and internal managers have confidence in the company’s ability to deliver solid returns. While it does not guarantee performance, it is a positive indicator when those who know the company best are significant shareholders.

Dividend Growth and Market Position

OCSL has delivered solid high dividend growth, making it one of the few BDCs to grow its dividends over the past year. According to the Sovereign Wealth Fund Institute, they are currently the 13th largest BDC in the industry, placing them on the higher end of the spectrum. Their dividend growth, coverage, and solid investment portfolio have transformed them into one of my favorite BDCs in the industry.

Final Thoughts

In summary, OCSL has demonstrated strong performance and resilience, making it a compelling investment. Their ability to grow dividends consistently, maintain a well-diversified investment portfolio, and avoid non-accrual investments highlights their robust business model and strategic management. While the company has experienced significant changes and challenges since its inception, Brookfield’s involvement has revitalized Oaktree Specialty Lending, making it a valuable addition to my portfolio.

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