Up to date on February twenty seventh, 2023 by Samuel Smith

Buyers on the lookout for excessive yields would possibly think about shopping for shares of Enterprise Improvement Firms, or BDCs for brief. These shares often have the next dividend yield than the broader inventory market common.

Some BDCs even pay month-to-month dividends.

You possibly can obtain our full Excel spreadsheet of all month-to-month dividend shares (together with metrics that matter like dividend yield and payout ratio) by clicking on the hyperlink under:

 

Oxford Sq. Capital Company (OXSQ) is a BDC that pays a month-to-month dividend. Oxford Sq. can also be a really high-yielding inventory, with a yield of 11.8% based mostly on anticipated dividends for fiscal 2022. That is greater than 7 occasions the common yield of the S&P 500.

Nonetheless, buyers ought to at all times remember the fact that the sustainability of a dividend is simply as necessary (or extra necessary) than the yield itself.

BDCs usually present excessive ranges of revenue, however many (together with Oxford Sq.) have hassle sustaining their dividends, significantly throughout recessions. This text will look at the corporate’s enterprise, development prospects and consider the protection of the dividend.

Enterprise Overview

Oxford Sq. Capital Corp. is a BDC (Enterprise Improvement Firm) specializing in financing early and center–stage companies by loans and CLOs. You possibly can see our full BDC listing right here.

The corporate holds a well-diversified portfolio of First–Lien, Second–Lien, and CLO fairness property unfold throughout seven industries, with the best publicity in software program and enterprise providers, at 34.2% and 27.8%, respectively.

Supply: Investor presentation

The corporate’s property have a gross funding worth of round $340.2 million in 61 positions, with the common funding by truthful worth representing simply 1.6% of the whole portfolio.

Oxford Sq. introduced its Q3 outcomes for the interval ending September thirtieth, 2022, on November seventh. The corporate reported producing round $11.4 million of whole funding revenue, indicating a 15.2% enhance from the earlier quarter. The rise in whole funding revenue was primarily on account of rising rates of interest. Specifically, the weighted common yield of debt investments was 10.4% on the present value, in comparison with 9.0% in Q2-2022. Nonetheless, the rise was partially offset by a decrease money distribution yield from OXSQ’s CLO fairness investments, which fell sequentially from 20.7% to 16.6%.

Complete bills, which consist primarily of managers’ charges and curiosity paid by itself financing, amounted to $5.8 million, remaining steady in comparison with Q2-2022. Because of the increased whole funding revenue and steady bills, the web funding revenue (NII) amounted to $5.6 million, or $0.11 per share, in comparison with $4.3 million or $0.09 sequentially.

The online asset worth (NAV) per share was $3.34, which was decrease than the earlier quarter’s $3.67 on account of a lower within the worth of the corporate’s property. Given the present portfolio composition, we now mission a FY2022 IIS of $0.40 for the corporate.

Supply: Investor presentation

Development Prospects

The corporate’s funding revenue per share has been declining at an alarming charge, as financing has turn out to be cheaper, stopping Oxford Sq. from refinancing at its earlierly increased charges. Moreover, the corporate has been traditionally over–distributing dividends to shareholders, decaying its NAV, and due to this fact future revenue technology, on account of fewer property.

Contemplating that the Fed has made it clear that they intend to extend charges no less than as soon as extra this 12 months, we anticipate that Oxford Sq. will have the ability to generate steady funding revenue per share within the close to time period.

The 2020 dividend reduce ought to lead to Oxford Sq. retaining some money, hopefully beginning to regrow its NAV. With charges unlikely to proceed moving any decrease, revenue technology ought to stabilize over the subsequent few years

With funding throughout a large breadth of various industries, Oxford Sq. has a reasonably balanced portfolio. The corporate’s prime three industries do make up many of the portfolio, however they’re in several areas of the financial system. This provides some safety in case of a downturn in a single business.

Nonetheless, with charges declining over time, the corporate’s receivables have been additional pressurized, worsening its financials yearly. General, we consider that the corporate’s future investment revenue technology carries substantial dangers, whereas a possible recession and an adversarial financial setting may severely harm its curiosity revenue.

Dividend Evaluation

Oxford Sq. solely just lately started paying a month-to-month dividend, with the primary being distributed in April 2019. Complete dividends paid over the previous few years are listed under:

• 2015 dividends: $1.14
• 2016 dividends: $1.16 (1.8% enhance)
• 2017 dividends: $0.80 (31% decline)
• 2018 dividends: $0.80 (no enhance)
• 2019 dividends: $0.80 (no enhance)
• 2020 dividends: $0.6120 (23.5% decline)
• 2021 dividends: $0.42 (31.4% decline)

Shareholders obtained a small enhance in 2016, adopted by three massive dividend reductions since 2017. This inconsistency in dividend payout is as a result of firm’s unstable monetary efficiency.

Oxford Sq. at present pays a month-to-month dividend of $0.035 per share, equaling an annualized payout of $0.42 per share. This may symbolize flat year-over-year efficiency for dividends in 2022.

Primarily based on a full-year payout of $0.42 per share, Oxford Sq. inventory yields 11.8%. Whereas the dividend cuts lately have been massive, the dividend yield stays very excessive. That mentioned, buyers shouldn’t focus solely on yield; dividend security is a crucial consideration for revenue buyers, and in that regard, Oxford Sq. leaves lots to be desired.

Utilizing our expectation for full-year funding revenue per share of $0.40 for 2022, the corporate is projected to take care of a dividend payout ratio of 105% for 2022. This might lead to one other dividend reduce if its funding revenue declines from present ranges.

Ultimate Ideas

Oxford Sq. has a stable enterprise mannequin, with diversification throughout funding property and industries. The corporate has additionally taken steps to construct up its much less dangerous asset place whereas lowering its reliance on riskier CLOs.

That mentioned, Positive Dividend recommends that risk-averse buyers keep away from Oxford Sq.. We consider that the dividend doesn’t provide sufficient security. The corporate distributes basically all of its funding revenue, leaving little wiggle room. Any drops in funding revenue can lead to dividend cuts.

We echo these issues and charge Oxford Sq. a Promote.

If you’re fascinated about discovering extra high-quality dividend development shares appropriate for long-term funding, the next Positive Dividend databases might be helpful:

The key home inventory market indices are one other stable useful resource for locating funding concepts. Positive Dividend compiles the next inventory market databases and updates them month-to-month: