Blackstone Secured Lending: Boost Your Cashflow With This 10% Yield (NYSE:BXSL)

Blackstone Secured Lending (NYSE:BXSL) convinces with its strong net investment income trajectory, a low pay-out ratio, top loan quality, a growing net asset value as well as a commitment to raising the quarterly dividend. Although I am not chiefly a BDC investor, I believe Blackstone Secured Lending makes a very strong value proposition for dividend investors as the portfolio is centered around a first lien strategy and portfolio quality is exemplary. At the same time, Blackstone Secured Lending trades at a reasonable premium to net asset value and the dividend is very well-supported by net investment income!

BXSL is emerging as a top BDC income play

In FY 2023, a number of business companies have seen a decline in the quality of their loan portfolios, such as Oaktree Specialty Lending (OCSL) which makes those BDCs with strong loan quality stand out even more. One company that has consistently maintained very strong loan quality is Blackstone Secured Lending which had a non-performing loan (non-accrual) ratio of less than 0.1% in the fourth-quarter (which was stable Q/Q).

For context, even Ares Capital (ARCC), which is held in high regard due to its ability to deliver consistent portfolio results over time, and which I called a 10%-yielding piggy bank, had a non-accrual percentage of 0.6% (based off of fair value) in the fourth-quarter. The only BDC that I know of that comes even close to Blackstone Secured Lending’s loan quality is Hercules Capital (HTGC) which had a non-accrual percentage of 0.0% in Q4’23.

Blackstone Secured Lending’s first lien strategy and its focus on stringent risk management meant to avoid capital losses has allowed the company to maintain high loan quality which of course breeds a lot of confidence in the company’s net investment income results. The BDC’s loan portfolio was valued at approximately $9.9B in the fourth-quarter and almost entirely consisted of first liens (99% of investments are senior secured first liens).

Blackstone Secured Lending generates the overwhelming amount of its total investment income from the debt portion of its portfolio: the BDC’s interest income represented 94% of its total investment income in the last year, so Blackstone Secured Lending is looking at a high level of recurring interest income that supports the BDC’s dividend.

In FY 2023, Blackstone Secured Lending generated $1.1B in interest income, showing 37% growth year over year. The increase in interest income traces back to BXSL having invested 99% of its funds into loans that carry variable rate interest rates. With the Fed driving a higher federal fund rate last year, Blackstone Secured Lending has seen a sizable uptick in its NII.

Because of this strong growth in interest income and the company’s focus on variable rate debt investments, Blackstone Secured Lending also saw 35% growth in its net investment income in FY 2023. This growth, in part, has been returned to shareholders last year as the BDC raised its dividend twice and more dividend increases in FY 2024 are therefore likely. Given how strong the company’s dividend coverage metrics are, I believe investors could get a dividend increase even if Blackstone Secured Lending’s net investment income growth slows this year.

A quick look at Blackstone Secured Lending’s dividend coverage ratio shows why the BDC could raise its dividend beyond the $0.77 per-share that is currently paid. The investment firm generated between 123-151% in quarterly dividend coverage last year, implying significant upside for the dividend. Blackstone Secured Lending achieved 100%+ dividend coverage consistently since at least Q4’20 and the BDC paid a number of supplemental cash dividend and boosted its quarterly dividend a number of times as well.

Blackstone Secured Lending’s valuation

BDCs with low non-accrual percentages, double-digit growth in net investment income and growth in net asset value are deserving of a NAV premium, in my opinion. Blackstone Secured Lending’s shares are trading at a near-20% premium to net asset value which compares against a 62% premium for Hercules Capital and a relatively small 11% premium for Ares Capital. Blackstone Secured Lending is also currently trading 15% above its 3-year average P/NAV ratio of 1.04X… a reflection of the company’s outstanding business results in FY 2023. I believe a premium of ~20% is justified given Blackstone Secured Lending’s demonstrated ability to grow its NII and dividend. While I don’t see a lot of share price upside, I believe the 10% is rock solid and worth buying.

Risks with Blackstone Secured Lending

Blackstone Secured Lending has seen 30%+ growth in its net investment income last year which was chiefly driven by a higher federal fund rate. The Federal Reserve likely won’t raise the federal fund rate again so it will be all but impossible for the BDC to achieve comparable NII growth results in FY 2024. As a result, dividend investors must expect slower net investment income growth as well as less leverage stemming from its variable loan portfolio in a lower-rate world.

Final thoughts

Blackstone Secured Lending has dividend investors a lot to offer: the company generated strong, double-digit interest income and net investment income growth in FY 2023, although I expect these tailwinds to soften in FY 2024. What I like more than anything else is Blackstone Secured Lending’s focus on capital protection which has been reflected in the BDC’s first lien strategy and in a very low non-accrual percentage. Considering that Blackstone Secured Lending is also shareholder-friendly in the sense that it raises its quarterly dividend, I believe the BDC is deserving of a top spot in an income-oriented portfolio!