OWL - Blue Owl Capital: Expected To Grow And Raise Its Dividend

2023-09-25 01:37:08 ET

Summary

• Blue Owl Capital stock has traded in a range of $10-13 per share since June, with recent trading at the top end of that range.
• The company reported solid Q2 results, and its partnership with Abu Dhabi's sovereign fund has been well-received by the market and could improve fundraising outlook.
• The future outlook of the company is positive, which is why I rate OWL as a buy.

The last time I wrote about Blue Owl Capital ( OWL ) was back in June at $11.50 per share. I issued a BUY rating, because of high expected earnings growth of 15-20% and management's guidance for a $1 dividend by 2025, which would put the yield on cost at almost 9% in less than three years. I initiated a position back then, but I was fully aware that the stock would be volatile and was ready to add to my position on any meaningful drop.

Since then, OWL has continued to trade in a range of roughly $10-13 per share, briefly giving investors an opportunity to load up on shares below the $10 mark and today trades at the top-end of that range. The company has also reported very solid Q2 2023 results in August and recently has received a commitment of $1 billion from Abu Dhabi's sovereign fund.

Q2 Results

Let's start by going over the results and in particular OWL's ability to attract new capital which is the single most important driver of their future growth. Fundraising during the second quarter has slowed as expected with just under $3 billion in inflows, compared to $3.8 billion during the first quarter and nearly $5 billion during the last quarter of 2022.

As of the end of Q2, the company was one quarter behind relative to their AUM targets, but with the recently announced Abu Dhabi deal, the fundraising outlook seems to be improving.

The sovereign fund has decided to partner with OWL to invest in its private credit division, specifically the Technology Lending platform, which focuses on providing credit to technology and software companies.

One billion isn't much in the grand scheme of things for OWL (it's less than 1% of total AUM), but the fact that a foreign sovereign fund is interested in the company's unique products speaks volumes and has been well rewarded by the market by about a 7% price rise on the announcement.

Moreover, on a year-over-year basis, the company is still showing solid growth with AUM increasing by 26% to $150 billion of which $93 billion accrues fees and nearly $120 is classified as permanent capital.

I also want to point out that although fundraising has slowed, redemptions have been low (with outflows at 12% of inflows), partly thanks to a large portion of permanent capital that OWL holds.

Fee-related earnings (an important metric that most asset managers are valued on) grew by 24% YoY to $245 million per quarter or $0.17 per share, driven by double-digit AUM growth and a stable gross margin of 60%+ which is fully in line with the best in the sector.

One thing that sets OWL apart is the fact that their fees average 1.5% of fee-bearing capital, which is higher than that of OWL's established competitors such as Blackstone ( BX ) which averages about 1%. The reason OWL is able to charge a higher fee is their unique mix of products, in particular as it relates to private credit.

OWL is an asset-light business which means that it doesn't own any assets and its balance sheet reflects this. The company maintains a BBB rating, has a low cost of capital of 3% which is way below treasury yields at the moment and most importantly has very long maturities for most of its debt from 2031 to 2051 (13 years on average). As such, the company faces very little interest rate risk. The only way in which high interest rates affect OWL is the valuation multiple and the effects it has on the fundraising environment.

Valuation and outlook

OWL is a great combination of income and growth. Management has confirmed their $1 dividend target for 2025 with an expected payout ratio of 90%, which should translate into distributable earnings of $1.11 per share within three years. As of the most recent quarter, annualized distributable earnings stood at $0.64 per share, which means that OWL expects to grow by about 70% over a three-year period.

That's really impressive growth by any measure, especially on an investment that already pays a solid dividend yield of 4.4%. Only the future will tell if the company can deliver on this ambitious target, but I think that even growth at half the expected pace would deliver very solid outperformance from today's levels.

Here's the thing. OWL is expected to grow much faster than BX and even Brookfield Asset Management ( BAM ), yet it trades at a significantly lower FRE multiple of 17x, compared to 28x+ of its larger peers.

I don't think OWL should trade so much lower, because it has a really good management team, and has shown very strong growth over the past few years and the recent partnership with Abu Dhabi's sovereign fund only confirms that this is an asset management player to take seriously.

Traditionally, quality asset managers trade at 20-25x FRE. I'm going to forecast on the low end of that range, despite the fact that it has one of the highest proportions of permanent capital in the industry. At 20x FRE the price target for 2025 stands at $22 per share using management's target growth and at $17 per share assuming growth at half the pace.

Even at $17 per share, there is an upside of 36% to be realized over three years on top of a nearly 5% dividend, which is very likely to result in market beating double-digit returns. This is why I rate OWL a BUY here at $12.50 per share, especially after the announced partnership with a strong international sovereign fund.

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