Oaktree Vs. Trinity: Trinity Looks Attractive (NASDAQ: OCSL)

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Oaktree Capital shareholders (NASDAQ:OCSL) can feel comfortable as the business development company continues to outperform broader market trends and prove its worth as a dividend option for low-risk portfolios. It is worth owning Oaktree due to its non-accumulation of 0% with an 87% portfolio concentration on secured debt. Despite this, I am concerned about the company’s potential for dividend growth due to its cautious investment strategy, declining investment commitments and volatile earnings growth. Meanwhile, its competitor, Trinity Capital (TRIN), appears better positioned to capitalize on the growing demand for risky debt due to its aggressive investment strategy, product diversification and potential to generate strong cash returns in the years to come.

BDCs thrive despite market bearish trends

The US stock market has already lost trillions of dollars so far in 2022, but it’s still hard to predict how long the downtrend will last. The higher-than-expected CPI data suggests that the Fed may extend its tight monetary policy to keep inflation under control. For stock markets, higher rates combined with an economic contraction will lead to lower corporate profits and revenues. As a result, investors may need to reconsider their portfolio preferences. Historically, buying dividend paying stocks is the best way to beat down market trends.

So far in 2022, companies specializing in business development have demonstrated their ability to thrive in difficult market conditions. They continue to pay substantial dividends and their stocks remain less volatile than the market as a whole. Indeed, high rates and slow venture capital funding have increased the demand for venture capital debt. To raise funds, capital-hungry startups are turning to venture debt rather than selling stakes at a huge discount to venture capital. Data from PitchBook shows that venture capital debt volumes in the United States reached $17.1 billion in the first half of 2022, up 7.5% from the same period last year.

As BDCs continue to rise despite broader bearish market conditions, investors should still be cautious when picking stocks. Indeed, different investment approaches and different rates of return and growth make BDCs different from each other. Therefore, dividend investors must select the right BDC to ride out the bearish market conditions and achieve sustainable long-term returns.

Is Oaktree Capital the solid BDC to own?

Listed on NASDAQ in 2008, Oaktree Capital is a leading business development company with a market capitalization of $1.20 billion. Shareholders have received strong and consistent returns from the company over the past decade, and those returns have increased significantly over the past two years. In addition to cash yields, many other metrics indicate that it may be a safe investment for dividend investors. For example, Oaktree’s portfolio is heavily focused on secured loans, thereby reducing the risk of bad debts. As of June 2022, approximately 70% of its portfolio was invested in first lien, while approximately 17% was in second lien. In total, 13% of BDC’s portfolio holdings were unsecured investments in equities and joint ventures. In addition, the company has $455.0 million in unused credit facility and $34.3 million in unrestricted cash and cash equivalents.

Composition of the portfolio

Portfolio Composition (Third Quarter Presentation)

Since past performance is no guarantee of future success, I’m concerned that Oaktree’s cautious investment approach will hamper its ability to generate healthy dividend growth. More concerning is that the company’s chief executive and chief investment officer, Armen Panossian, expressed confidence in Oaktree’s cautious investment strategy during the latest conference call. He said they are currently more conservative than in the past. It is prudent to be disciplined in asset allocation in current market conditions, but this strategy has begun to impact his investment income and dividend growth.

Investing activity

Investing activity (third quarter presentation)

In the June quarter, the company’s investment commitments fell to $131 million, from $227 million in the prior quarter and $178 million a year earlier. The company’s investment commitments also fell significantly, from around $385 million in the September quarter of last year. Lower investment commitments mean lower net investment income for the business. In the June quarter, its adjusted net investment income was $0.17 per share, compared to $0.18 per share in the prior quarter and $0.19 per share a year ago. Based on quantitative data from Seeking Alpha, the company’s review factor received an F rating, indicating that Wall Street analysts are lowering their expectations. If Oaktree’s investment income stagnates, it could struggle to continue raising dividends on a quarterly basis. A payout ratio of 100% based on last quarter’s net investment income also suggests less room to increase dividends in subsequent quarters.

But Trinity Capital’s aggressive strategy paves the way for high returns

A strategy of investing aggressively in growth opportunities and capitalizing on the growing demand for risky debt securities places Trinity Capital in a strong position to deliver sustainable dividend growth. The company has doubled its workforce over the past two years and started working closely with startups to help them achieve their goals. Additionally, the company doubled its investment commitments to a record $460 million in the first half of 2022 compared to the same period last year. Its portfolio assets also surpassed the $1 billion level for the first time in the June quarter.

Its forward dividend yield jumped to more than 12% after increasing its September quarter dividend by 7% to $0.45 per share. It has increased its dividends every quarter since its NASDAQ debut in early 2021. Additionally, the company’s confidence in its fundamentals is also reflected in hefty extra dividends of $0.15 per share over the past three quarters. consecutive. With a forecast of over $2 in earnings per share for 2022, Trinity’s dividend growth looks completely safe. If you want to learn more about Trinity Capital, read my article “Trinity Capital: A Great Time to Buy for Massive Gains”.

Quant Grading favors Trinity over Oaktree

Quantitative notes

Quantitative notes (looking for Alpha)

Seeking Alpha’s Quantitative Rating System also rates Trinity as a Solid Buy with a Quantitative Score of 4.81, while Oaktree received a Quantitative Score of 3.08 with a Hold rating. Besides momentum, Trinity received strong ratings on the rest of the quantitative factors. A grade for profitability and B plus for growth justifies my stance on its aggressive investment strategy and higher earnings growth potential. The B rating for the revisions also reflects that Wall Street analysts are optimistic about its potential for future earnings growth. Oaktree, however, lags far behind Trinity in many areas, including growth, profitability, and reviews. The company received a negative C rating on growth, a B+ on profitability, and an F on reviews.

Final Thoughts

There is no doubt that business development companies are proving to be recession proof. Despite this, choosing the right stock is essential to obtaining sustainable returns over time. Oaktree is a solid BDC with a high dividend yield and excellent dividend history. However, its cautious investment strategy and declining earnings growth potential pose a risk to its dividend growth in the coming quarters. On the other hand, Trinity’s aggressive investment strategy in high-yielding assets should boost earnings growth. So I see Trinity Capital as a worthwhile addition to a portfolio over Oaktree.

Margie D. Carlisle