Oaktree Capital Group: 5% Dividend Yield And Growing Assets

The benefits of the partnership structure are that the company is generally not subject to federal or state income tax.

Instead, the unitholders—often referred to as partners—are required to report their share of income.

Partnerships tend to offer high dividend yields, but do present more complex tax implications. Unitholders receive a K-1 form for tax reporting.

Growth Prospects

Rather than utilizing standard GAAP earnings-per-share, Oaktree reports in terms of distributable earnings. This figure excludes various non-recurring items that can skew GAAP earnings.

It is a similar metric as distributable cash flow, which is typically used by MLPs.

In 2016, Oaktree generated distributable earnings-per-unit of $2.94, up 22% from $2.42 in 2015. Last year was a very strong performance for the firm.

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OAK Earnings

Source: 2017 Quarterly Investor Presentation, page 22

Growth was due to higher assets under management, increasing fees, and higher incentive income.

Future growth will be augmented by the company’s record fundraising last year. Oaktree saw a 22% increase in fee-related earnings in 2016.

New products, such as the Opportunities Funds X/Xb and European Principal Fund IV, fueled $6 billion in closed-end fundraising last year.

This drove 4.2% growth in management fees in 2016.

Continued growth is likely, because the company has a lot of ‘dry powder’ left, meaning unallocated funds that have yet to begin generating fees.

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OAK Growth

Source: 2017 Quarterly Investor Presentation, page 13

As of December 31, 2016, uncalled capital commitments stood at $20.8 billion.Of this, $13.5 billion was not yet generating management fees.

The company’s pipeline of future products is robust, with additional real estate and debt funds lined up for 2017.

Separately, a more lax regulatory environment from the new administration is also a potential catalyst. Any de-regulation of the financial industry would likely be a plus for Oaktree moving forward, although how that exactly takes shape is unclear.

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JayS 3 years ago Member's comment

I think that the author doesn't completely understand what OAK is. One statement, that assets could flee in a market down-turn, is highly unlikely. Most of the fee generating assets are locked in for 10 years +/- investment periods. A market catastrophe such as that which we went trough in 2008 and 2009 was the trigger for the largest fund raising in the firms history. In fact the huge incentive income received in 2012 and 13 was the direct result of the investments made during and as a result of the financial collapse.

The more recent drop in distributions is partially the result of large portions of those fund's assets having been returned to investors.

On another point, he states that OAK has 1.22 times earnings coverage of the distribution. While that is true, It mean nothing! OAK choses to distribute that percentage of quarterly earnings. That ratio would never be in doubt. That is the whole reason why the distribution is highly variable.

Comparing OAK's price to earnings to the S&P 500's P/E isn't of much use. I don't think there is a simple financial metric that can be used to determine the value of an OAK unit.

The partnership's value can only be determined by the future investment results of each of its individual funds since the bulk of the company's value is the value of its investment success (incentive pay), the retention of skilled managers and its ability access large pools of capital when markets provide the proper conditions for OAK to

profitably put that capital to work.

You mention that OAK owns 20% of Double Line. The ability of OAK to establish that position shows how hard it is to use financial metrics to value OAK. Before that transaction, valuing OAK units based on any financial metric would never have told you that OAK would be called on to provide the capital to Double Line at such advantageous terms. It was the personal connections between the managements of the two companies, the ability of OAK to fund the transaction at short notice and OAK's ability to quickly evaluate the opportunity and complete the transaction. What financial metric can be used to evaluate that?

Sensible Cents 3 years ago Member's comment

SureDividend, what's your take on Jay's comment?