This afternoon we are moving Oaktree Specialty Lending Corporation from BUY to SELL.
Oaktree reported a reasonably strong quarter, with net investment income (adjusted for the merger with Oaktree Strategic Income) of $0.19/share, sharply higher than $0.12 a year ago and the consensus estimate for $0.14. Net asset value, or NAV, increased 2% from the prior quarter and 19% from a year ago (despite paying out roughly 8% of its NAV in dividends during this period).
Interestingly, the company raised its quarterly dividend by 12%, for its fifth consecutive quarter. This is paired with a sharp decrease in new investment commitments in the second quarter, although commitments picked up in July. We are getting a sense, both from the numbers and the company’s commentary, that the market for their type of investments has become exceptionally frothy (and thus unattractive to the highly disciplined management team).
The company’s turnaround is complete, both fundamentally and as its shares have reached our 7.00 price target. Its portfolio has been fully restructured and now features higher-quality companies and much more favorable lending terms (to Oaktree), and its balance sheet is conservatively financed and low-cost. Oaktree’s leadership is solid.
As such, we are moving OCSL shares to a Sell. Despite the appealing 8.3% dividend yield (on the new dividend), we now find the risk/return moving into unfavorable territory. If the shares were to fall sharply, our interest would quickly rekindle.
OCSL shares produced an estimated 68% total return since our July 2018 recommendation.