Sixth Street Specialty Lending: Best-Of-Breed BDC With 7.2% Core Yield

Sixth Street Specialty Lending: Best-Of-Breed BDC With 7.2% Core Yield

Henrik Sorensen/DigitalVision via Getty Images Sixth Street Specialty Lending, Inc. ( TSLX ) is a well-managed business development company with strong results that have propelled the BDC to the top of its class.

Sixth Street owns a well-managed portfolio of first lien, floating rate debt investments that generate predictable income for the company and its shareholders. The dividend is well covered by net investment income, creating an appealing opportunity for supplemental dividends. A High-Quality BDC With A Conservative Portfolio

Sixth Street invests conservatively in order to avoid defaults and ensure consistent portfolio income. Sixth Street’s allocation to the BDC is 91%. The BDC invests primarily in the most secure forms of debt available in the debt market, first lien debt. Second liens and debt below the second lien level make up 2% of debt investments, while equity and other investments make up 6%.

Sixth Street’s portfolio’s conservatism results in highly predictable portfolio cash flow, which means the dividend is also very safe. Sixth Street’s portfolio has evolved over time, with the BDC investing more in equity investments in recent years. Nonetheless, the proportion of equity investments is only 6%, indicating that the BDC has no excessive exposure to higher-risk investments. Asset Mix (Sixth Street Specialty Lending) Sixth Street’s portfolio has grown significantly over time as the BDC’s total portfolio size has grown. Sixth Street’s portfolio diversification has improved dramatically as more funds have become available for investment. The top ten investments in the BDC’s portfolio now account for only 27% of fair value, down from 70% in 2013. This leads us to the conclusion that Sixth Street’s investment portfolio today is significantly less risky than in the past. Portfolio Diversification (Sixth Street Specialty Lending) Sixth Street’s investment portfolio, which included 72 portfolio companies, was valued at $2.5 billion in December. As previously stated, the majority of investments are first lien debt with floating interest rates. The high proportion of floating rate investments provides Sixth Street with income upside from rising interest rates in the economy. With inflation currently on the rise, the Fed will have no choice but to raise interest rates this year. These interest rate increases may result in higher portfolio income for Sixth Street. Portfolio Highlights (Sixth Street Specialty Lending) Dividend Coverage

We can only tell if the Sixth Street dividend is truly ‘safe’ by examining the BDC’s dividend coverage over time and identifying any periods when Sixth Street failed to cover its dividend.

Sixth Street consistently covered its dividend with net investment income from 2013 to 2021, and the BDC’s dividend coverage has even improved in the last two years. The increased coverage is the result of asset values recovering.

In 2021, Sixth Street’s dividend coverage ratio was 132% based on net investment income excluding realized and unrealized gains. This coverage ratio indicates that net investment income outperformed the base dividend pay-out by 32%. Sixth Street, in conclusion, provides high yield investors with a very stable and predictable dividend. Dividend Coverage (Sixth Street Specialty Lending) The benefit of Sixth Street’s dividend coverage is that the BDC can afford to pay out more than just the base dividend, which is $0.41 per share quarterly. Sixth Street pays out supplemental cash dividends to shareholders, significantly increasing the stock’s yield. The stock yields 7.15% based on the current payout of $0.41 per share, but the BDC pays quarterly variable supplements ranging from $0.02 to $0.07 per share in 2021.

Sixth Street also pays special dividends to distribute excess income. In 2021, the BDC paid special dividends of $1.75 per share. When special dividends and quarterly variable supplements are factored in, the annual payout of $1.64 per share rises significantly. Data by YCharts Book Value And Premium Multiple

The long-term trend in book value growth is very positive, indicating that the BDC added value through prudent investment. As of 31 December 2021, the book value per share was $16.84. Book Value Per Share And Dividends Paid (Sixth Street Specialty Lending) After discussing Sixth Street’s performance, it should come as no surprise that Sixth Street’s stock trades at a premium to book value, which is usually reserved for only the best BDC stocks. Main Street Capital ( MAIN ) and Hercules Capital, Inc. ( HTGC ) are two of these ‘best-of-breed’ companies, with stocks that have consistently traded at a premium.

Sixth Street’s stock has historically traded at a premium to book value, and TSLX is likely to maintain that premium valuation as long as the BDC avoids larger investment mistakes. TSLX is […]

source Sixth Street Specialty Lending: Best-Of-Breed BDC With 7.2% Core Yield

Leave a Reply