Oaktree Capital Group: 5% Dividend Yield And Growing Assets

This is a very high yield, which is more than double the average dividend yield of the S&P 500 Index. As a result, the dividend should make up a large portion of Oaktree’s future returns.

With such a high yield, it would not be difficult for Oaktree to generate double-digit total annualized returns.

Oaktree’s distribution is covered by earnings. Last year, the company generated distributable earnings-per-unit that covered its dividend payout, by 1.22 times.

Put differently, the company generated 22% more distributable earnings than it needed to pay its distribution.

This leaves room for a modest distribution increase in 2017, provided that business conditions do not deteriorate. Of course, a recession in 2017 or 2018 would change this outlook.

Final Thoughts

Investment management firms can be riskier stocks than big banks or insurance companies. Their performance is reliant almost entirely on the talent of their portfolio managers.

When fund performance is strong, assets under management and related fees can grow at a high rate. However, when performance suffers, investors can rush for the exits.

An example of the latter is Franklin Resources (BEN), which is struggling with falling assets under management, due to poor performance of a few of its flagship funds.

If the U.S. stays out of recession moving forward, Oaktree should continue to grow, thanks to its strong fund performance over the past several years.

However, investors looking for lower-yielding bank stocks that come with a bit less risk should consider Wells Fargo (WFC) or JP Morgan Chase (JPM).

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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?