Oaktree Capital Group: 5% Dividend Yield And Growing Assets

Competitive Advantages & Recession Performance

The biggest competitive advantage in the investment industry is performance. This drives the reputation of the firm.

In order for an investment manager to generate high fees, it needs to show its clients that its fees are justified.

Oaktree’s performance has been strong for a prolonged period, which has provided the impressive growth of assets under management and distributable earnings.

One consideration for investors is that the company’s results could be volatile going forward. As shown in the above image, distributable earnings have fluctuated in recent years.

Going forward, a recession would likely hit Oaktree particularly hard.

Oaktree began trading publicly in 2012, so its financial performance during the Great Recession is unclear.

That said, it is a reasonable assumption that the company would suffer during a recession. The financial performance of investment management firms is correlated with the performance of the markets.

A recession naturally causes markets to decline, which would likely cause Oaktree’s assets under management—and fees—to decline as well.

Valuation & Expected Returns

Valuing Oaktree in terms of distributable earnings, reveals that the stock is modestly priced at the present time.

Based on 2016 distributable earnings-per-unit of $2.94, Oaktree trades for a price-to-earnings ratio of 15.8, which is below average.

The S&P 500 Index has an average price-to-earnings ratio of 26.

Given the company’s growth in assets under management, there could be room for the valuation multiple to expand.

Aside from an expanding price-to-earnings ratio, the stock will generate returns based on earnings growth and dividends.

Oaktree pays a quarterly distribution to unitholders. In the past four quarters, the company distributed $2.41 to investors.

Based on its current share price, Oaktree has a 5.2% dividend yield.

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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?