11%-Yielding Owl Rock: Another Day, Another Dollar

Summary

• Owl Rock Capital's share price has dipped recently, giving value investors an opportunity to lock in a high yield.
• It has sound portfolio fundamentals and maintains plenty of liquidity.
• I also highlight the dividend, balance sheet, valuation, and other important points.
• Looking for a portfolio of ideas like this one? Members of Hoya Capital Income Builder get exclusive access to our subscriber-only portfolios. Learn More »

ansonsaw

I don't know about you, but I like to break out my annual dividend amount into a weekday amount, to simulate the idea of my capital working for me. It's quite simple, actually, as it's just the total annual dividend amount divided by 260 (52 weeks times 5 work days per week).

As you can imagine, this is a good self-motivational tool and it's also a good budgeting tool to employ, as breaking out the annual dividend enables the investor to better match daily, weekly, or monthly cash outflows with a recurring income stream.

This brings me to Owl Rock Capital Corp. (NYSE:ORCC), which recently bumped up its dividend while announcing a supplemental one to boot. In this article, I highlight why 11% yielding ORCC is a high income stock that should rank high on an income investor's list.

Why ORCC?

Owl Rock Capital is one of the top 3 largest BDCs by asset size and is externally managed by Owl Rock Capital Advisors. It was founded in 2015 and due to its larger size, focuses on direct lending solutions for upper middle market companies in the U.S. At present, its investment portfolio carries a fair value of $12.8 billion across 180 portfolio companies, an increase of 12 companies since the end of June.

ORCC's larger size means that it has the capacity to do larger deals, providing anchor debt financings in the $200 to $600 million range. It also has wide reaching relationships with over 640 private equity sponsors, giving it access to valuable insights and deal pipeline.

Management is also selective about deals, with average 2.5x EBITDA to interest coverage ratio and loan to value of 45% across the portfolio, implying significant skin in the game by equity sponsors and company insiders. It also means that an underlying company with a loan in default would have to lose significant value before ORCC begins to incur losses.

Moreover, the portfolio is comprised primarily of senior secured loans, representing 87% of the portfolio (72% first lien), and is well-diversified by industry. Much of the remainder is comprised of preferred equity (3%) and common equity (7%) for more upside potential on the net asset value. As shown below, software, finance/insurance, food, and manufacturing make up ORCC's top 5 sectors representing 45% of portfolio fair value.

ORCC Portfolio Mix (Investor Presentation)

Meanwhile, ORCC's portfolio demonstrates strong underlying fundamentals, with NAV per share rising by 2.5% on a sequential basis to $14.85 in the third quarter. Importantly, it generated NII per share of $0.37, well in excess of the third quarter dividend rate of $0.31, and prompting management to raise the dividend rate by $0.02 to $0.33 during fourth quarter.

Furthermore 89% of the portfolio is performing at or above expectations, 10% below expectations, and less than 1% performing materially below expectations or are anticipated to default on debt obligations. It's worth noting that the non-accrual rate is low, comprised of just 2 portfolio companies (out of 180), comprising just 0.6% of the fair value of the debt portfolio.

Looking forward, ORCC is well-positioned to continue to benefit from higher interest rates, especially considering that the market anticipates more rate hikes from the Federal Reserve, albeit at a slower pace. This is reflected by the fact that 98% of ORCC's debt investment portfolio is floating rate, while just 53% of its own debt is floating rate (47% are fixed rate).

It's average cost of debt of 4.3% sits well below ORCC's return on equity of 10% in the latest quarter. Lastly, ORCC is reasonably leveraged, with a debt to equity ratio of 118%, sitting well below the 200% statutory limit, and has significant liquidity with $2.1 billion in cash and undrawn debt capacity, and maintains an investment grade rating of BBB- from S&P.

Turning to valuation, ORCC has become more attractive after the recent dip in price to $12.26, equating, equating to a substantial 17% discount to NAV per share of $14.85. Given's ORCC's size, portfolio quality, and outlook with higher interest rates, I believe ORCC deserves to trade closer to its NAV even with potential for an economic slowdown early next year. Analysts have a consensus Buy rating with an average price target of $14.73, implying potential for strong double-digit returns including dividends.

ORCC Price Target (Seeking Alpha)

Investor Takeaway

With its growing size, strong portfolio quality, attractive valuations and ample liquidity, ORCC provides attractive risk-adjusted returns with a high and well-covered dividend yield. In addition, management has proven to be prudent in their deal selection and risk management, which should give investors comfort. Overall, ORCC is a compelling investment opportunity for income-oriented investors who are looking for potentially strong total returns from dividends and capital appreciation.

Disclosure: I/we have a beneficial long position in the shares of ORCC either through stock ownership, options, or other derivatives. 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.