10.25%-Yielding Owl Rock Capital Corporation Is One Of My Favorite BDCs (NYSE:ORCC)

Owl Rock Capital Corporation (NYSE:ORCC) doesn’t have the following that Main Street Capital (MAIN) or Ares Capital (ARCC) do on Seeking Alpha, but it’s one of the most interesting buys in the Business Development Corporation (BDC) space. I invest in BDCs specifically for the yield, as they are income investment vehicles for me.

Owl Rock Capital Corporation has become very interesting, and while many are following the popular BDCs on Seeking Alpha, there is an opportunity in ORCC that may be going overlooked. I want to invest in quality BDCs that have an attractive net investment income to market cap ratio, a larger than average dividend yield, and trade at a discount to their net asset value (NAV). ORCC checks off all of these boxes, the board has authorized additional supplemental dividends, so shareholders benefit from earnings growth, and ORCC is betting on themselves as the board has issued a $150 million share repurchase program. Needless to say, I believe ORCC is one of the best-positioned BDCs for an investment going into earnings season, and I plan on adding to my position in the coming months.

Many investors love when companies buy back shares, but what’s even better is when employees outside of the C-suite opt into a repurchase program

There may not be a stronger sign of confidence than when a board of directors establishes a buyback program. Investors typically view buybacks positively because it indicates that the management team believes shares of the company are undervalued. By making the decision to repurchase shares, management is making a clear statement that buying company shares on the open market is a more financially sound decision than allocating capital toward other endeavors. Share buybacks can also boost earnings per share as earnings are now dispersed to fewer shares outstanding and improve a company’s financial metrics, which can lead to an appreciating share price. Buybacks can also send a message to the market and investors that the company is in a strong financial position and it has a stable cash flow.

ORCC’s Board authorized a new $150 million repurchase program, which replaces the previous program. This is extremely favorable to shareholders because it projects a position of financial stability from management. What I find to be more exciting is that it’s not just the company that is buying shares in ORCC. Owl Rock Capital Corporation and Blue Owl employees each intend to purchase stock in the open market to take advantage of its discounted price. Blue Owl employees have also opted to participate in an investment vehicle that intends to buy an additional $25 million of ORCC’s stock.

Just so there is no confusion, I want to explain Blue Owl and ORCC. Blue Owl is an alternative asset manager and a leading provider of private capital solutions. Blue Owl has over $132 billion of assets under management (AUM) and operates through three platforms. ORCC is Blue Owl’s BDC platform and manages $65.7 billion in AUM, and acts as a capital provider to middle and upper-middle-market businesses.

From an investor standpoint, this is exciting news. Management is signaling that they have confidence in the company and feel that shares of ORCC are undervalued through the new buyback plan. I am also excited about Blue Owl employees partaking in purchasing shares of ORCC stock. For me, it sends a much stronger message that the employees are buying $25 million worth of ORCC shares because they aren’t using corporate capital; it’s coming out of their pockets. The only reason for them to purchase is they think it’s a good investment, and that is a powerful message.

ORCC just raised the dividend and is implementing special dividends going forward

A wise man once said that the safest dividend is the one that was just increased. Well, Owl Rock Capital Corporation didn’t just raise the dividend; they are implementing special dividends going forward. In Q3, ORCC generated $0.37 of net investment income, which was a $0.02 beat. ORCC made a strong dividend announcement as they declared a $0.33 dividend which is a 6.5% increase QoQ, in addition to announcing a supplemental dividend of $0.03. ORCC is seeing strong earnings momentum from their underlying business and made this specific comment on the Q3 earnings call:

We are also announcing several capital actions to ensure that our shareholders benefit from this earnings momentum. First, we are increasing our regular quarterly dividend. Our Board has declared a fourth quarter dividend of $0.33 per share, up $0.02 from our third quarter dividend of $0.31 per share. We also want to ensure our shareholders benefit from the consistent earnings we expect in excess of our regular dividend going forward. And as such, we are introducing a new quarterly supplemental dividend in addition to our regular dividend. For the third quarter, our Board has declared a supplemental dividend of $0.03 per share.

Owl Rock Capital Corporation’s management team is certainly aligned with shareholder interests. Based on the new dividend, shares of ORCC will generate $1.32 per share, which is a 10.25% yield based on the current share price of $12.88. ORCC will also provide supplemental dividends throughout the year, which will be capped at an additional $0.15 annually. The current framework is that ORCC will allocate 50% of the additional earnings in excess of the quarterly dividend to a quarterly supplemental dividend. In this case, the Q3 supplemental dividend is an additional $0.03 per share. If this is replicated throughout the year, then shares of ORCC would generate $1.44 per share, which is an 11.18% yield based on the current share price.

ORCC looks undervalued when I look at the largest BDCs

Owl Rock Capital Corporation is far from the most popular BDC on Seeking Alpha, as MAIN, ARCC, and Prospect Capital Corp (PSEC) have more than triple the followers of ORCC. I think ORCC is floating under the radar, and there is a chance that many investors are not familiar with ORCC. When evaluating BDCs I like to look at the largest operators, including FS KRR Capital Corp (FSK), Ares Capital, Goldman Sachs BDC (GSBD), Prospect Capital Corp, Owl Rock Capital Corp, Barings BDC (BBDC), Golub Capital BDC (GBDC), Sixth Street Specialty Lending (TSLX), Gladstone Capital (GLAD), MidCap Financial Investment Corporation (MFIC), Oaktree Specialty Lending Corporation (OCSL), and Main Street Capital as the peer group.

There are three metrics I use to evaluate against the peer group, which include the NII to market cap multiple, price to NAV discount, and the dividend yield. NII is a better metric than EPS to utilize for a BDC so the NII to market cap is a more effective measure than a P/E ratio. This is why I utilize this metric to see how cheap BDCs are trading against their NII. I also like to see if there is a steep discount or a heavy premium with a BDCs price to NAV valuation in addition to looking at the yield and dividend coverage.

Company	Ticker	Followers
Main Street Capital	MAIN	63,550.00
Ares Capital	ARCC	63,220.00
Prospect Capital Corp	PSEC	60,410.00
Oaktree Specialty Lending Corporation	OCSL	20,770.00
Owl Rock Capital Corp	ORCC	20,010.00
MidCap Financial Investment Corporation	MFIC	16,700.00
Gladstone Investment	GLAD	12,290.00
FS KKR Capital Corp	FSK	11,060.00
Goldman Sachs BDC	GSBD	10,480.00
Sixth Street Specialty Lending	TSLX	10,400.00
Golub Capital BDC	GBDC	8,900.00
Barings BDC	BBDC	3,180.00

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ORCC currently trades at an 11.31x NII to market cap multiple, which is the 4th lowest in its peer group. The average NII to market cap is 18.82x, and there are 5 BDCs in the peer group that trades over an 18x NII to market cap multiple. From this valuation, ORCC looks to be trading at an enticing valuation.

There is a wide range in the price to NAV discount that ranges from -26.47% to 48.46% within the group. ORCC trades at a -13.27% discount to its NAV. The peer group trades at a -0.03% discount to their NAV. This is interesting because ORCC has an attractive multiple against its net investment income, and the fact that shares trade under the NAV makes buying shares more attractive to me.

As I indicated earlier in the article, BDCs are income-generating investments for me. I want to make sure I am getting a strong yield at a great price. Owl Rock Capital Corporation currently yields 10.25% compared to the peer group average of 10.12%. When the supplemental dividend is taken into consideration, ORCC’s yield jumps to 11.18%. I am getting a strong double-digit yield without the supplemental dividend, and when the supplemental is factored in, ORCC has some room for appreciation before its yield drops into the single digits.

Conclusion

Owl Rock Capital Corporation is part of my Dividend Harvesting Series portfolio on Seeking Alpha (can be read here), and I own shares in my main dividend account. I plan on adding more shares of ORCC to both accounts going forward, as shares seem to be undervalued compared to its peer group. I think management is sending a strong message that they believe shares are undervalued through the newly authorized buyback program.

What’s even better is that Blue Owl employees are backing up managements stance and are entering into a share purchasing program of Owl Rock Capital Corporation as well. Today you can buy shares of ORCC under its NAV, and get a strong double-digit yield. ORCC has a management team that is aligned with shareholders and is also rewarding us with supplemental dividends based on earnings performance.

With such a large purchase program from employees, everyone stands to gain when Owl Rock Capital Corporation does better, and I love it when management is incentivized to perform. I think Owl Rock Capital Corporation is an underrated and underfollowed BDC and believe shares are trading at an attractive price for income investors.