Month-to-month Dividend Inventory In Focus: Oxford Sq. Capital

Up to date on September twelfth, 2024 by Felix Martinez

Buyers on the lookout for excessive yields would possibly take into account shopping for shares of Enterprise Growth Corporations, or BDCs for brief. These shares often have the next dividend yield than the broader inventory market common.

Some BDCs even pay month-to-month dividends.

You’ll be able to obtain our full Excel spreadsheet of all month-to-month dividend shares (together with metrics that matter, like dividend yield and payout ratio) by clicking on the hyperlink beneath:

Oxford Sq. Capital Company (OXSQ) is a BDC that pays a month-to-month dividend. Oxford Sq. can be a really high-yielding inventory, with a yield of 14.5% based mostly on anticipated dividends for fiscal 2024. That is greater than 8 occasions the common yield of the S&P 500.

Nevertheless, buyers ought to at all times needless to say the sustainability of a dividend is simply as vital (or extra vital) than the yield itself.

BDCs usually present excessive ranges of earnings, however many (together with Oxford Sq.) have hassle sustaining their dividends, significantly throughout recessions. This text will look at the corporate’s enterprise, progress prospects and consider the security of the dividend.

Enterprise Overview

Oxford Sq. Capital Corp. is a BDC (Enterprise Growth Firm) specializing in financing early and center–stage companies by means of loans and CLOs. You’ll be able to see our full BDC listing right here.

The corporate holds a well-diversified portfolio of First–Lien, Second–Lien, and CLO fairness property unfold throughout seven industries, with the very best publicity in software program and enterprise providers, at 38.2% and 20.6%, respectively.

Supply: Investor presentation

On August thirteenth, 2024, Oxford Sq. introduced its Q2 outcomes for the interval ending June thirtieth, 2024. The corporate reported complete funding earnings of $11.4 million, a lower from $13.5 million within the earlier quarter. This decline was primarily because of lowered curiosity earnings from debt investments and decrease earnings from securitization automobiles.

The weighted common yield on debt investments dropped barely to 13.7% from 13.9% in Q1. Nevertheless, the money distribution yield on money income-producing CLO fairness investments elevated from 13.7% to 16.2%. The efficient yield on CLO fairness investments was 9.4%, down marginally from 9.5%.

Whole bills, primarily together with curiosity prices and administration charges, have been $3.7 million, $450,000 decrease than in Q1. Because of this, web funding earnings (NII) rose by $1.2 million to $7.7 million, or $0.13 per share. The corporate’s web asset worth (NAV) per share barely improved to $2.43 from $2.42. Based mostly on its present portfolio, Oxford Sq. initiatives a full-year 2024 funding earnings per share (IIS) of $0.46.

Supply: Investor presentation

Development Prospects

The corporate’s funding earnings per share has been declining at an alarming fee, as financing has turn into cheaper, stopping Oxford Sq. from refinancing at its earlierly increased charges. Moreover, the corporate has been traditionally over–distributing dividends to shareholders, decaying its NAV, and subsequently future earnings era, because of fewer property.

Contemplating that the Fed has made it clear that they intend to extend charges no less than as soon as extra this 12 months, we anticipate that Oxford Sq. will be capable to generate steady funding earnings per share within the close to time period.

The 2020 dividend reduce ought to end in Oxford Sq. retaining some money, hopefully beginning to regrow its NAV. With charges unlikely to proceed moving any decrease, earnings era ought to stabilize over the following few years

With funding throughout a large breadth of various industries, Oxford Sq. has a reasonably balanced portfolio. The corporate’s high three industries do make up a lot of the portfolio, however they’re in numerous areas of the economic system. This provides some safety in case of a downturn in a single business.

Nevertheless, with charges declining over time, the corporate’s receivables have been additional pressurized, worsening its financials yearly. General, we imagine that the corporate’s future investment earnings era carries substantial dangers, whereas a possible recession and an antagonistic financial surroundings may severely harm its curiosity earnings.

Dividend Evaluation

Oxford Sq. solely not too long ago started paying a month-to-month dividend, with the primary being distributed in April 2019. Whole dividends paid over the previous few years are listed beneath:

2015 dividends: $1.14
2016 dividends: $1.16 (1.8% improve)
2017 dividends: $0.80 (31% decline)
2018 dividends: $0.80 (no improve)
2019 dividends: $0.80 (no improve)
2020 dividends: $0.6120 (23.5% decline)
2021 dividends: $0.42 (31.4% decline)
2022 dividends: $0.42 (Flat)
2023 dividends: $0.54(28.5% improve)

Shareholders obtained a small improve in 2016, adopted by three massive dividend reductions since 2017. This inconsistency in dividend payout is because of the firm’s unstable monetary efficiency.

Oxford Sq. at present pays a month-to-month dividend of $0.035 per share, equaling an annualized payout of $0.42 per share. This may signify a lower in year-over-year efficiency for dividends in 2024.

Based mostly on a full-year payout of $0.46 per share, Oxford Sq. inventory yields 14.5%. Whereas the dividend cuts in recent times have been massive, the dividend yield stays very excessive. That stated, buyers mustn’t focus solely on yield; dividend security is a crucial consideration for earnings buyers, and in that regard, Oxford Sq. leaves so much to be desired.

Utilizing our expectation for a full-year funding earnings per share of $0.46 for 2024, the corporate is projected to keep up a dividend payout ratio of 91% for 2024. Nevertheless, if funding earnings declines from present ranges, one other dividend reduce may outcome.

Ultimate Ideas

Oxford Sq. has a stable enterprise mannequin, with diversification throughout funding property and industries. The corporate has additionally taken steps to construct up its much less dangerous asset place whereas reducing its reliance on riskier CLOs.

That stated, Certain Dividend recommends that risk-averse buyers keep away from Oxford Sq.. We imagine that the dividend doesn’t provide sufficient security. The corporate distributes primarily all of its funding earnings, leaving little wiggle room. Any drops in funding earnings can lead to dividend cuts.

We echo these considerations and fee Oxford Sq. a Maintain.

Don’t miss the assets beneath for extra month-to-month dividend inventory investing analysis.

And see the assets beneath for extra compelling funding concepts for dividend progress shares and/or high-yield funding securities.