Blue Owl Capital Continues To Deliver Strong Earnings And Larger Dividends (NYSE:OBDC)

Blue Owl Capital Corporation (NYSE:OBDC) may have changed its name from Owl Rock Capital Corporation, but returning large amounts of income to shareholders remains front and center. OBDC has been one of my favorite Business Development Corporations (BDC), and after reporting strong Q2 earnings, OBDC remains undervalued. It still amazes me that less than 30,000 investors follow OBDC on Seeking Alpha, and while BDCs such as Main Street Capital (MAIN) are more popular with 67,760 followers, OBDC has a larger yield and trades at a discount to its net asset value (NAV). There isn’t much to complain about as OBDC continues to reward shareholders with a growing special dividend, and senior leadership conducted some insider buying during Q2.

Senior leadership continues to be aligned with shareholders as several SEC Form 4s were filed in Q2

When insiders are buying, it sends a strong signal that the individuals closest to the information feel that the current share price represents an opportunity. There are many reasons to sell a stock, but only 1 reason to buy, and that’s because you believe it will generate a profit. In addition to signaling that shares could be undervalued when insiders purchase shares, their interests become more aligned with shareholders. I love seeing insider purchasing, and insiders at OBDC purchased shares in Q2 of 2023. The purchases can be found on the OBDC investor relations page (click here for the Form 4 links). Below are the purchases:

I feel that this sends a clear message to shareholders as there is a healthy mix of senior leadership and board members purchasing shares. Craig Packer, who is the CEO, just spent $1 million and significantly increased his position in OBDC. At the end of May several insiders added shares of OBDC, and I don’t feel a bearish sentiment can be correlated to these events. I am thrilled that the C-Suite continues to open their wallets and hold the common shares of OBDC along with shareholders. This ensures that when management makes decisions, it is just as impactful for them as it is to anyone who is investing in OBDC. I plan on adding more OBDC to the Dividend Harvest Portfolio series on Seeking Alpha (the latest article can be read here) and in my dividend portfolio.

OBDC delivered strong Q2 earnings, allowing OBDC to buy back shares and continue paying a supplemental dividend

OBDC is firing on all cylinders as they delivered $0.48 of net investment income (NII), which is a $0.02 beat from the consensus, and their total investment income grew 44.2% YoY to $394.22 million in Q2. OBDC’s NII set a new corporate record, and in the press release, Craig Packer indicated that OBDC can generate return on equity (ROE) of 12$ for 2023. OBDC’s investment income reached record levels due to an increase in the portfolio’s weighted average yield from 11.5% at the end of Q1 to 11.7% at the end of Q2.

OBDC is providing value for shareholders as its net income continues to increase and provides room to invest further in its portfolio. OBDC’s total portfolio at fair value was $12.9 billion across 187 companies as they committed to $183 million of new investments in Q2. OBDC has $1.8 billion in on-hand liquidity between its cash and undrawn debt to fund future investments. On a per-share basis, OBDC generated $0.48 per share in net investment income and $0.50 in net income.

Cash is king, and OBDC is using theirs to reward shareholders. In addition to the normal dividend, OBDC also returned capital via buybacks and continued the supplemental dividend. Back in November of 2022, the board approved a $150 million buyback program. In Q2, OBDC repurchased 100,000 shares, and since the $150 million buyback was approved, OBDC has repurchased 4.1 million shares at an average price of $12.22.

Management didn’t stop at the repurchases, as they continued issuing the normalized quarterly dividend at $0.33 and approved their 4th consecutive supplemental dividend of $0.07. Management is delivering on its promise of returning more capital to shareholders as it generates increased levels of net investment income. This is what I want to see from an income investment, as OBDCs management is creating value across the board for shareholders.

OBDC’s NAV also increased QoQ from $15.15 to $15.26. While this may not seem like a lot, it’s the 4th consecutive quarter that its NAV has increased. Shares of OBDC are trading -9.17% discount to its NAV, which is interesting considering OBDC is the 3rd largest BDC by market cap, and 3rd largest by net assets. On a TTM basis, OBDC has also generated the 3rd largest amount of NII from the BDCs I follow, and the difference in NII between OBDC and Prospect Capital Corp. (PSEC) is $252.87 million. I am happy to add shares at a discount to NAV as OBDC has generated $673.81 million in NII in the TTM and continues to return additional levels of capital back to shareholders.

OBDC looks undervalued compared to its peers, and I am buying more

I track the following BDCs, and OBDC looks undervalued compared to this peer group:

• Main Street Capital (MAIN)
• Prospect Capital Corp. (PSEC)
• FS KKR Capital Corp (FSK)
• Barings BDC (BBDC)
• Blue Owl Capital Corporation (OBDC)
• MidCap Financial Investment Corporation (MFIC)
• Goldman Sachs BDC (GSBD)
• Oaktree Specialty Lending Corporation (OCSL)
• Golub Capital BDC (GBDC)
• Ares Capital (ARCC)
• Gladstone Capital (GLAD)
• Sixth Street Specialty Lending (TSLX)

Prior to showing the updated valuations, I want to disclose that I am a shareholder of the following BDCs, and I am going directly by the numbers and not playing favorites. OBDC, FSK, BBDC, MAIN, GSBD, GBDC, ARCC.

I went through each company’s financials to establish their NII on a TTM basis. Now that PSEC just reported all of the updated NII numbers complete.

The two main aspects I look at when I evaluate BDCs are the multiple on NII that I am paying and if its NAV is being valued at a premium or a discount. OBDC trades at an 8.02x multiple on its NII and generated the 3rd largest amount of NII in the peer group. The peer group trades at an average NII multiple of 8.47. I am very comfortable paying below the peer group average for OBDC’s NII.

I like paying a great price for companies, and today, OBDC trades at a -9.17% discount to its NAV. The peer group trades at an average discount of -1.03% to their NAVs. While I agree with ARCC getting a premium, some of the other companies that have premiums to their NAV are generating significantly less NII than OBDC and feel that this is an opportunity to grab shares of OBDC prior to eventually trading at fair value.

I invest in BDCs to generate income, and the peer group has an average yield of 10.12%. OBDC has a dividend yield that is slightly below the peer group average at 9.52%. I am more than happy to sacrifice a bit of yield when paying a low multiple on OBDCs NII and a discount to the NAV. OBDC has also been paying a supplemental dividend, which bumps the yield up well past the peer group average when taken into consideration.

Conclusion

BDCs aren’t for everyone, and they are geared more toward income investors. They won’t be grabbing headlines like big tech, but the income generated is immense. OBDC is one of my favorite BDCs, and I continue to buy shares. I think OBDC is being undervalued by Mr. Market as its shares trade at a discount to NAV. Management is clearly aligned with shareholders as 5 members of senior leadership conducted insider purchases in May. OBDC is growing its NAV, buying back shares, and paying a supplemental dividend in addition to its 9.52% yielding regular dividend. There isn’t much to dislike, and if you’re interested in BDCs, then OBDC should be at the top of your list.