Welcome to the first installment of my portfolio series, where I’ll be providing an in-depth analysis of all 31 stocks currently in my personal portfolio. Today, we’ll be diving into Al Rock Capital Corporation, ticker ORCC. This series aims to offer a comprehensive look at each holding, focusing on both income investing and dividend growth investing, with a preference for stocks yielding at least four percent.
Before we begin, I’d like to clarify that the order of these analyses does not reflect
my preference or the size of my holdings. Each stock is unique, and my approach is to present an unbiased view. As a holder of these stocks, I am naturally biased, so please conduct your own research before making any investment decisions. Your feedback is valuable, so let me know how I can improve this series as we progress.
My Holdings and Dividends
Logging into my Vanguard account, where I manage all my dividend investments, I currently own 684 shares of ORCC. Al Rock Capital pays a quarterly dividend, with the most recent payment being 33 cents per share, not including the occasional special dividends. With my holdings, I receive approximately $225.89 in dividends each quarter. Breaking it down monthly, that’s about $75.29 in dividends from Al Rock alone. This positions ORCC as one of my larger holdings in terms of both capital invested and dividend income, though I do have larger positions in other stocks.
What is Al Rock Capital Corporation?
Al Rock Capital Corporation is a business development company (BDC), which primarily invests in small and medium-sized businesses, as well as distressed businesses in certain scenarios. They provide financing across various sectors in the U.S. middle market, targeting investment opportunities with favorable risk-adjusted returns, including senior secured, subordinated, or mezzanine loans. Their goal is to deliver favorable returns while preserving capital through different credit cycles.
Founded in 2015, Al Rock Capital went public in 2019 and is owned by Blue Owl Capital, a significant player in alternative asset management. Despite being relatively new to the public market, ORCC has made significant strides in the BDC space, becoming one of the largest with $13.2 billion in total assets, according to the Sovereign Wealth Fund Institute.
Evaluating Al Rock Capital Corporation
One of the reasons I was initially drawn to Al Rock is their impressive growth in the BDC sector despite their recent IPO. Generally, when selecting BDCs, I prefer those with a long track record, as they typically invest in smaller, non-public companies, making it challenging to assess the performance of their investments. BDCs with extensive histories offer more data to analyze, including financial performance, stock price trends, and dividend stability.
While ORCC’s IPO in 2019 doesn’t provide a long history, the company has shown resilience and growth through significant market fluctuations, including the pandemic and the recent bear market. This resilience and growth are crucial factors that caught my attention.
Portfolio Size and Diversification
Al Rock Capital’s significant asset base is indicative of its strong market presence. When analyzing a BDC, examining the size and diversification of their investment portfolio is essential. A larger portfolio often suggests better diversification, which can mitigate risk. Diversification is critical for individual investors and BDCs alike, as it spreads exposure across different industries, reducing the impact of a downturn in any single sector.
ORCC’s latest investor presentation highlights a well-diversified portfolio with investments across various industries. Their largest sector exposure is in internet software and services, followed by insurance, food and beverage, and manufacturing. This broad sector exposure indicates a balanced approach, avoiding high-risk sectors like tech startups and crypto companies, which some other BDCs, like Trinity Capital, are involved in.
Investment Strategy and Risk Management
One aspect I particularly appreciate about Al Rock is their focus on senior secured investments. Approximately 86% of their portfolio consists of senior secured debt, which ranks highest in the repayment priority in case of a borrower’s default. This focus on senior debt adds a layer of safety to their investment strategy, ensuring they are among the first to recover their capital if a borrower faces financial distress.
Although senior debt is safer, it generally offers lower returns compared to unsecured debt or equity investments. This trade-off between safety and growth potential is a crucial consideration. Al Rock balances this by maintaining a conservative portfolio while still capturing opportunities for income and growth.
Historical Performance and Dividends
Despite their short history as a public company, Al Rock has never cut their dividend. In fact, they increased their dividend for the first time in December and have a history of paying special dividends. This commitment to returning capital to shareholders is a positive indicator of their financial health and management’s confidence in their business model.
Additionally, 98% of Al Rock’s investments are in floating rate debt. This means as interest rates rise, the companies borrowing from Al Rock will pay higher interest rates, boosting Al Rock’s income. However, this also increases the default risk if interest rates rise too quickly, making it harder for borrowers to service their debt.
Final Thoughts on Al Rock Capital Corporation
Al Rock Capital Corporation has quickly become one of my favorite income holdings and is likely my second favorite BDC. Their significant asset base, conservative investment strategy, and consistent dividend payments make them an attractive choice for income-focused investors. Their ability to grow and maintain dividends through challenging market conditions demonstrates their resilience and effective management.
Additional Insights
Currently, only three of Al Rock’s loans are on non-accrual status, meaning the companies are not able to make interest payments on their loans. Given that Al Rock has investments in 184 companies with a portfolio of over $13 billion, having only three non-accrual loans is relatively low and a positive sign.
Another aspect I like about Al Rock is their insider ownership percentage, which stands at 1.6% according to Finviz. While this might seem modest, it is slightly above average and indicates that the board and management have confidence in the company’s future performance.
Moreover, Al Rock’s reporting of financial results is exceptionally detailed and organized, making it easier for investors to interpret their performance. Their portfolio performance report, which shows the status of their investments, is a valuable resource. As of the last quarter, 13% of their investments are performing better than expected, 77% are average, 10% are below average, and less than 1% are significantly below average or at default risk.
Analyst Ratings and Market Position
Al Rock’s stock has four investment-grade ratings, which, while not the most crucial metric, adds a layer of credibility and attractiveness to institutional investors. Good ratings can help boost the stock’s performance as more financial firms might consider purchasing it.
Conclusion
Al Rock Capital Corporation stands out in my portfolio for several reasons: its size, conservative investment strategy, consistent dividends, and detailed financial reporting. It has proven to be a reliable income generator, making it a key component of my income-focused investing strategy.