Oaktree Capital Group, LLC (NYSE:OAK) is a dividend stock led by a legendary debt investor. The company performs best during turbulent markets and political unrest. Oaktree Capital has a low correlation to the stock market. The management team is led by 40-year market veteran Howard Marks. If the last quarter dividend can be maintained, the annual yield is projected to be 8.4%. The dividend yield will vary, however, upon the firm's success in navigating the distressed debt, subordinated debt, and illiquid markets. I believe Oaktree Capital Group, LLC provides diversification in a balanced income portfolio.
Oaktree Capital Management was founded in 1995 by a group of investment veterans with expertise in high-yield bonds, distressed debt, convertible securities, control investments, real estate securities and equities. Since its founding, Oaktree has grown assets under management (AUM) to $77 billion with funds from large global pension plans, sovereign wealth funds, endowments and foundations, and state retirement plans.
Since its initial public offering (NYSEARCA:IPO) in April 2012, Oaktree has paid four quarterly distributions: 1) $0.55 per unit in May 2012, 2) $0.79 in August 2012, 3) $0.55 in November 2012, and $1.05 in February 2013 ($4.20 annualized). Distributions have not been at a consistent dollar amount because they are tied to quarterly performance.
Oaktree shares currently trade at $50.65, up about 17.8% from their IPO price of $43 and near the top of their 52-week range of $34 - $51.72. The annualized dividend yield is 8.4%. This is based upon the 4th quarter dividend. Oaktree has a market capitalization of $1.53 billion and a price-to-earnings ratio of 13x.
The company has over 700 employees, with headquarters in Los Angeles and offices in New York, Stamford, London, Amsterdam, Paris, Frankfurt, Luxembourg, Hong Kong, Beijing, Singapore and Seoul. The company's investment philosophy rests on risk control, bottom up analysis, disavowal of market timing, market inefficiency, consistency and specialization. In 1996, Oaktree started a longstanding advisory relationship with investment giant Vanguard for convertible securities and later for emerging markets.
Here are the core Oaktree Capital strategies:
In addition to growing its investment portfolio, Oaktree has a sophisticated technology platform for internal controls, risk management, reporting and client care. In 2012, seventeen years after its founding, Oaktree went public. 65% of its equity is owned by insiders and its Principals retain 97% voting control. Oaktree management is strongly aligned with shareholders on value creation.
Oaktree specializes in a limited number of sophisticated asset classes in less efficient markets. Most of its assets are focused on corporate debt, distressed debt and controlled investing, with small amounts focused on convertible securities, real estate and listed equities (see chart below).
The table below shows funds received from various investor classes. Public funds account for 30% of AUM, corporate pensions account for 19%, and insurance and sovereign wealth contribute 9% each. 3% of AUM comes from Oaktree and Other sources. The table below shows fund sources.
Oaktree is led by eight Principals and headed by Howard Marks as Chairman. Mr. Marks is an investment veteran with top tier educational qualifications in accounting and finance and over 40 years of experience with convertibles, high yield, distressed debt and other fixed income instruments, most recently with TCW, a large Los Angeles-based asset management company. Bruce Karsh serves as President and Portfolio Manager. Mr. Karsh too has extensive experience and is a TCW alumnus where he managed the Special Credits Fund for seven years. In addition, the company's six other Principals have various asset management and operational roles in the company. Oaktree Principals are highly qualified industry veterans.
Here is a listing of key personnel:
Mr. Marks is the author of "The Most Important Thing: Uncommon Sense for the Thoughtful Investor." Famed investor Warren Buffett respects Mr. Marks' work. Mr. Buffett made the following comment about Mr. Marks and the book:
Assets under Management
With $11 billion raised, 2012 was Oaktree's sixth consecutive year of $10+ billion in gross capital raised. Gross capital raised was offset by distributions to closed-end fund investors.
At year end, AUM was $77.1 billion, up $2.2 billion over 2011 (on higher fair market value) but down $3.9 billion over 3Q12 on distributions to closed-end fundholders. Of this, $66.8 billion generated management fees, roughly the same as at year end 2011. $34 billion generated performance-based incentives, down $2.2 billion over 4Q11 on distributions partly offset by market value increases and drawdowns.
Oaktree has a new fund focused on distressed debt - the Oaktree Opportunities Fund IX, L.P. with capital commitments of $5 billion - which will commence operations in 2013.
In the 4th quarter of 2012, Oaktree had an interim close of its Oaktree Enhanced Income Fund, L.P. for leveraged senior loan investments; this fund is expected to close with over $2 billion in assets, well above its $1.5 billion target.
The Oaktree Real Estate Opportunities Fund VI, L.P. (ROF VI) had a January 2013 close with $436 million committed against a target of $1.5 billion.
In January 2013, the company launched Oaktree Principal Fund VI, L.P. (PF VI) for control investing in distressed middle market companies, with target commitments of $3 billion.
In the fourth quarter, management fees dipped $1.4 million on higher fund liquidations than commitments on new funds, incentive income gained a record $178.2 million with contributions from the OCM Opportunities Fund VIIb, the Oaktree Value Opportunities Fund and other real estate and control investing funds, and investment income gained $8.7 million. As a result, total segment revenues were up a record $185.6 million to $447 million in the fourth quarter. For the full year, segment revenues were up $358.9 million to $1.41 billion on increases in investment income (up $178.6 million), incentive income (up $157.1 million) and management fees (up $23.1 million). See table below.
Revenues were offset by compensation, incentive compensation and general expenses. After factoring in net interest and other expenses, adjusted net income was up a record $143.7 million to $220.4 million from $76.7 million in fourth quarter of 2011, and to $717.3 million in fiscal year 2012 from $428.4 million in fiscal year 2011.
Fourth quarter distributable earnings were up $188.7 million to $238.1 million from $49.4 million in fourth quarter of 2011 on higher incentive and investment income.
Oaktree's fourth quarter had record high revenues, distributable earnings and distributions to clients of its closed-end funds and to unitholders.
For its fourth quarter ended December 31, 2012, Oaktree reported a 19% jump in management fees to $42.8 million, primarily due to higher AUM, and incentive income of $4 million, up from zero in the fourth quarter of 2011. As a result, total revenues were up 30% to $46.8 million.
Compensation and benefits expense dropped in almost half, to $195.3 million. G&A expenses were up 18% while consolidated fund expenses dipped 26%. Overall, expenses were down 44% to $248 million. The company reported an operating loss of $201.2 million, down from an operating loss of $406 million in fourth quarter of 2011.
Interest expense was down 7% in the quarter. Income from interest and dividends, $510.4 million, was more than 40-times quarterly interest expense but was down 11%.
Operating losses were more than covered by a $1.26 billion realized gain on investment, up 280% from a $435.4 million gain in 4Q11. As a result, Oaktree reported GAAP net income of $1.36 billion of which $39.3 million was attributable to Oaktree after non-controlling redeemable interests in consolidated funds, up from a net loss of $28.9 million in fourth quarter of 2011 on non-cash compensation expenses tied to the vesting of certain employee units.
Class A common units count increased 33% to 30.2 million and earnings per share swung from a net loss of $1.28 to a net gain of $1.30.
For fiscal 2012, Oaktree reported a 4% drop in management fees and a 31% drop in incentive income. Total revenues were down 7% to $145 million.
Compensation and benefits expense dropped almost 60% to $589 million. G&A expenses were up 5% while consolidated fund expenses dipped 12%. Overall, expenses were down 52% to $790.6 million. The company reported an operating loss of $645.6 million, down from an operating loss of $1.49 billion in fiscal year 2011.
Interest expense was down 10% in 2012. Income from interest and dividends, $1.97 billion, was more than 40 times quarterly interest expense but was down 23% over 2011. The company also realized a $4.56 billion gain on investments, up 161% from a $1.74 billion gain in fiscal year 2011. As a result, Oaktree reported GAAP net income of $6.67 billion of which $107.8 million was attributable to Oaktree after non-controlling redeemable interests in consolidated funds, up from a net loss of $96 million in FY11.
Class A common units count increased 24% to 28.2 million and earnings per share swung from a net loss of $4.23 to a net gain of $3.83.
At year-end 2012, Oaktree reported $458.2 million in cash, $370.6 million in government bonds and $1.1 billion in corporate equity investments at face value. Total assets were $2.4 billion, up 13% from $2.1 billion at year end 2011. Total unitholders capital was $1.4 billion, slightly below its market capitalization of $1.5 billion and 24% above 2011.
Oaktree is a solid asset management company with a highly qualified and experienced team of industry veterans. Fiscal and fourth quarter 2012 saw record incentive and investment earnings, record adjusted net income and record distributable income. GAAP results for 2011 reflect one-time non-cash expenses tied to the vesting of employee shares and do not reflect poor performance. Fundamental performance metrics have stayed consistent and show marked gains over 2011. The company yields a rich 8.4% distribution yield on record high share prices. At current levels too, Oaktree appears to be a solid income and capital appreciation stock.
Disclosure: I am long OAK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.