Updated on July 21st, 2021 by Bob Ciura
Investors looking for high yields might consider buying shares of Business Development Companies, or BDCs for short. These stocks frequently have a higher dividend yield that the broader stock market average.
Some BDCs even pay monthly dividends.
You can download our full Excel spreadsheet of all monthly dividend stocks (along with metrics that matter like dividend yield and payout ratio) by clicking on the link below:
Oxford Square Capital Corporation (OXSQ) is a BDC that pays a monthly dividend. Oxford Square is also a very high yielding stock, with a yield of more than 8% based on expected dividends for 2021. This is more than 6 times the average yield of the S&P 500.
However, investors should always keep in mind that sustainability of a dividend is just as important (or more important) than the yield itself.
BDCs often provide high levels of income, but many (including Oxford Square) have trouble maintaining their dividends, particularly during recessions. This article will examine the company’s business, growth prospects and evaluate the safety of the dividend.
Oxford Square Capital Corp. is a BDC (Business Development Company) specializing in financing early and middle–stage businesses through loans and CLOs. You can see our full BDC list here.
The company holds an equally split portfolio of First–Lien, Second–Lien, and CLO equity assets spread across 8 industries, with the highest exposure in business services and healthcare, at 36.4% and 27.5%, respectively.
The company’s assets have a gross investment value of around $320 million in 53 positions, with 6.3% of debt securities being secured. OXSQ generates around $50 million in annual interest payments.
On April 27th, Oxford Square reported its Q1 results for the quarter ended March 31st, 2021. The company generated approximately $9.4 million of total investment income, an increase of 9.3% compared to the previous quarter but 13.53% lower on a year-over-year basis.
This was due to the declining rates over this period, which affected the company’s investment yields. The weighted average yield of its debt investments was 7.7% at the current cost, compared with 8.0% as of December 31st, 2020.
Cash income from its CLO equity investments also saw declining yields, from 19.2% to 17.9% during this period. Total expenses, which primarily include interest paid on its own financing and managers’ fees, amounted to $4.5 million, 15.3% higher compared to Q4.
As a result, NII (net investment income) amounted to around $4.8 million, or $0.10/share, stable QoQ. Net asset value (NAV) per share was $4.88 compared to $4.55 in the previous quarter due to last year’s distribution cut.
Assuming management does not intend to over–distribute, as has been the case in the past, which has led to a deteriorating NAV, we expect this year’s IIS/share to be around $0.44.
The company’s investment income pershare has been declining at a 10–year CAGR of 9.3%, as financing has become cheaper, preventing Oxford Square from refinancing at its previously higher rates. Additionally, the company has been historically over–distributing dividends to shareholders, decaying its NAV, and therefore, future income generation due to fewer assets.
Considering that the Fed has made it clear that they intend to hold rates near zero, we find it incredibly unlikely that Oxford Square will be able to return to its previously gross interest generated. Consequently, we expect IIS & DPS to remain stable in the medium term.
The 2020 dividend cut should result in Oxford Square retaining some cash, hopefully starting to regrow its NAV. With rates a bit unlikely to continue moving any lower, income generation should stabilize over the next few years
With investment across a wide breath of different industries, Oxford Square has a fairly balanced portfolio. The company top three industries do make up most of the portfolio, but they are in different areas of the economy. This adds some protection in case of a downturn in one industry.
However, with rates declining over time,the company’s receivables have been further pressurized, worsening its financials annually. Overall, we believe that the company’s future investment income generation carries substantial risks, while a potential recession and an adverse economic environment could severely damage its interest income.
Oxford Square only recently began paying a monthly dividend, with the first being distributed in April 2019. Total dividends paid over the past few years are listed below:
- 2015 dividends: $1.14
- 2016 dividends: $1.16 (1.8% increase)
- 2017 dividends: $0.80 (31% decline)
- 2018 dividends: $0.80 (no increase)
- 2019 dividends: $0.80 (no increase)
- 2020 dividends: $0.6120 (23.5% decline)
Shareholders received a small increase in 2016, followed by two large dividend reductions since 2015. This inconsistency in dividend payout is due to the company’s volatile financial performance.
Oxford Square currently pays a monthly dividend of $0.035 per share, equaling an annualized payout of $0.42 per share. This would represent another decline of 31% for dividends in 2021.
Based on a full-year payout of $0.42 per share, Oxford Square stock yields 8.6%. While the dividend cut is large, the dividend yield remains very high. But investors should not focus solely on yield; dividend safety is an important consideration for income investors, and in that regard, Oxford Square leaves a lot to be desired.
Using our expectation for full-year investment income per share of $0.44 for 2021, the company is projected to maintain a dividend payout ratio of 95.5% for 2021. This leaves almost no cushion if the company’s fundamentals deteriorate in the future, which could result in another dividend cut if its investment income declines from current levels.
Oxford Square has a solid business model, with diversification across investment asset and industry. The company has also taken steps to build up its less risky asset position while decreasing its reliance on riskier CLOs.
That said, Sure Dividend recommends that risk-averse investors avoid Oxford Square. We believe that the dividend does not offer enough safety. The company distributes essentially all of its investment income, leaving little wiggle room. Any drops in investment income can (and have) result in dividend cuts, such as last year.
We echo these concerns and rate Oxford Square a hold, but only for investors not afraid to take outsized risks.