Owl Rock Capital Stock: Yield 8.3%, Wake Up and Feel the Cash Flow (NYSE:ORCC)
Inflation took center stage again this week, with the March Inflation Report indicating that prices rose 8.5% year-on-year. It gives new meaning to the phrase “cash is trash” as it becomes more and more expensive to hold money. This is why it pays to buy income-generating assets that can help preserve one’s hard-earned wealth. This article explains why Owl Rock Capital (NYSE: ORCC) can be a solid choice for those looking for high income in times of inflation, so let’s get started.
Why Owl Rock Capital?
Owl Rock Capital is a business development firm that was founded in 2015. It is BDC’s second largest by assets and is externally managed by Owl Rock Capital Advisors. The company focuses on debt financing for middle market companies with annual EBITDA between $10 million and $250 million.
Like other quality BDCs, Owl Rock is focused on providing direct lending solutions. This allows the company to issue and manage its own loans, giving it more control over the quality of its portfolio. This is reflected in the fact that 90% of its loans are secured senior, with 75% first-tier investments and 15% second-tier investments.
It has also done a good job of growing its net asset value/share. ORCC’s net asset value per share has increased in each consecutive quarter since last year, currently standing at $15.08. In addition, the dividend is well covered with a payout ratio of 78% based on the overall net income of the last 4 quarters, as shown below.
Looking ahead, ORCC is well positioned with plenty of dry powder, as it has a strong liquidity position of $1.8 billion, made up of cash and unused debt capacity. It is also reasonably leveraged, with a leverage ratio of 1.13x, well below the statutory limit of 2.0x, and only 0.1% of the fair value of ORCC’s loans are in default. accounting. Furthermore, ORCC should benefit from a rising interest rate environment since 99% of its borrowings are at variable rates.
Risks for ORCC include the potential for recession, as highlighted by Bank of America (BAC), due to soaring consumer prices. This could lead to pressure on ORCC’s portfolio companies. Management has highlighted the impact of rising rates and believes that its portfolio companies are able to withstand rate hikes, as noted on the recent conference call:
We assess the impact of a rising interest rate environment on the ability of our borrowers to service their debt. Our borrowers now benefit from strong interest hedging measures. And based on our analysis, we think they have enough cushion to manage if rates rise in line with current market expectations. While we continue to monitor these issues closely, overall our observations suggest that tailwinds from healthy consumer spending and strong demand will outweigh these headwinds in 2022.
I see value in ORCC at the current price of $14.86, given that it is currently trading below its NAV/share of $15.08. I think a premium is deserved, given the recent increases in net asset value and the overall size and quality of the portfolio. Analysts on the sell side have a consensus buy rating with an average price target of $15.64. This could translate to a potential total return of 14% over one year, including dividends.
Key takeaway for investors
Inflation is back with a vengeance, and that’s pushing investors to seek out income-generating assets. Owl Rock Capital can be an attractive option as it focuses on debt financing for middle market businesses. The company has strong fundamentals, including a well-covered dividend, and reasonable leverage with plenty of dry powder. I see value in ORCC at the current price for high income in the current inflationary environment.
Gen Alpha teams up with Income Builder
Gen Alpha has partnered with Capital Hoya to launch the first income-focused investing service on Seeking Alpha. Members receive full early access to our articles as well as exclusive income-focused model portfolios and a full suite of tools and models to help create sustainable portfolio income targeting higher dividend yields of up to 10%.
Whether you’re focused on high yield or dividend growth, we’ve got you covered exploitable investment research focused on real income asset classes that offer the potential for diversification, monthly income, capital appreciation and inflation hedging. Start a 2 week free trial today!