Recently, Oaktree Specialty Lending Corp. (OCSL), a business development company (BDC), cut its quarterly dividend by 27%. Usually, a large dividend reduction indicates that you should sell the stock if you own it. In the case of OCSL, however, it’s the opposite. The changes made by the company will make OCSL a better high-yield investment going forward.
For the 2024 fourth quarter, OCSL reported net investment income (NII) of $0.54 per share. This was down a penny from the previous quarter and, more importantly, a bit short of the $0.55 quarterly dividend the company had been paying.
For several quarters, OCSL has been challenged by accounts on non-accrual. As of the end of the year, the company had nine accounts on non-accrual, representing 3.9% of the total portfolio. Ouch! These challenges to the OCSL investments have been going on for several quarters.
To shore up the BDC, Oaktree Capital, an advisor to OCSL, agreed to buy $100 million of OCSL stock at the NAV, or book value. This was very beneficial for OCSL since the shares are trading at an 11% discount to NAV. The $100 million was immediately accretive to the book value, but more importantly, it gave OCSL new capital to invest with better quality clients.
The next big move by OCSL is a changed dividend policy. The new base dividend was set at $0.40 per share, and a bonus dividend policy was implemented to pay out half of the difference between the NII and base dividend as a supplemental dividend. As a result, a total $0.47 dividend will be paid on March 31—$0.40 as the base and $0.07 for the supplemental.
The new dividend policy will be hugely beneficial for investors. Worries about dividend coverage will be gone. The solid coverage should allow the OCSL share price to appreciate to close to or above the NAV. The supplemental dividend plan lets investors participate in increases in the NII.
The $100 million investment from Oaktree Capital will allow the BDC to grow NII per share, leading to increases in the supplemental payouts.
Oaktree Capital Specialty Lending is a “buy,” with a current yield of 10% on the base dividend. It is one of three BDCs on my Dividend Hunter portfolio.
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