OXLC - Oxford Lane Capital: High Yield Hides Small Total Returns

2023-09-01 10:26:59 ET

Summary

• Oxford Lane Capital Corporation offers a 19% dividend, but the dividend could be unsustainable and the NAV might continue to drop.
• Oxford Lane has a long history of dividend cuts and small total returns.
• High Fees are a constant headwind for Oxford Lane.

Many of my longtime friends, clients and readers understand that I am often critical of high yield stocks. It’s not that I don’t appreciate getting paid; it is more that I want my money to earn money not merely be returned to me by dividend payments. When I buy a high yield security, I want the dividend payments and the possibility for capital returns. Although I often look at high yield opportunities for medium term trades, I am cautious about these so called opportunities. So when a company like Oxford Lane Capital Corporation ( OXLC ) is offering a 19% dividend, I like to take a closer look. I want to know if the yield is sustainable and if the NAV is growing or declining. Although a short term trade could prove profitable in Oxford Lane, I believe the fees are too high, the dividend is unsustainable and the NAV will continue to drop making it at best a short term hold.

Oxford Lane Capital Corp. is a Many of my longtime friends, clients and readers understand that I am often critical of high yield stocks. It’s not that I don’t appreciate getting paid; it is more that I want my money to earn money not merely be returned to me by dividend payments. When I buy a high yield security, I want the dividend payments and the possibility for capital returns. Although I often look at high yield opportunities for medium term trades, I am cautious about these so called opportunities. So when a company like Oxford Lane Capital Corporation ( OXLC ) is offering a 19% dividend, I like to take a closer look. I want to know if the yield is sustainable and if the NAV is growing or declining. Although a short term trade could prove profitable in Oxford Lane, I believe the fees are too high, the dividend is unsustainable and the NAV will continue to drop making it at best a short term hold.

Oxford Lane Capital Corp. is a closed-end fund managed by Oxford Lane Management LLC, venturing into the realm of fixed income securities. With its inception on June 9, 2010, this United States-domiciled fund's focus lies in investing in securitization vehicles, which, in turn, target senior secured loans extended to companies with sub-investment grade or unrated debt. The fund's mission is to optimize risk-adjusted returns, currently achieved by delving into structured finance investments, particularly the equity and junior debt segments of collateralized loan obligation ((CLO)) vehicles. These CLOs are substantially backed by a diverse portfolio of senior secured loans issued to companies sporting unrated or below-investment-grade debt.

Since 2011, Oxford Lane shares have lost 74% of their value, falling from over $19 to today’s value of just over $5.

Throughout this period Oxford Lane has also returned $22.53 in dividends. The good news is that long term shareholders have not lost money. The bad news is that the dividend has been cut numerous times and the total return over the last 12 years is about 41%. Annually this works out to 3.4% total return. Throughout this time the dividend clearly has not made up for the loss of capital.

In closed end funds, you typically have to look at the NAV and I like to look at the expense ratio. A huge red flag to me is the current 12.45% expense ratio. This ratio seems unseemingly high compared to peers like Eagle Point Credit Co LLC which has an expense ratio of 9.53%.

These high fees have definitely been a big drag on performance and will continue to be a headwind for investors.

In February of 2022, Oxford had a NAV of around $7 as shown here which was a 6% decline from the month prior. Today the NAV is around $4.70 as highlighted in this recent news release . So in 19 months Oxford Lane has lost 33% of its NAV.

Potential Upside Risks

• Market Sentiment: Sentiment in the financial markets can change rapidly. If there's a positive shift in sentiment towards high-yield or leveraged credit instruments, OXLC's share price could rise as investors seek higher yields.

• Interest Rate Changes: Fixed-income investments like the ones held by OXLC are highly sensitive to interest rate movements. If interest rates decline, the value of OXLC's income-producing assets could increase, potentially driving its share price up.

• Credit Quality Improvement: If the credit quality of the underlying loans in OXLC's portfolio improves, it could result in higher valuations for those assets. This, in turn, could lead to a rise in OXLC's net asset value ( NAV ) and share price.

• Earnings Surprises: OXLC's financial performance and dividend payments can impact its share price. Positive earnings surprises or dividend increases might attract more investors, causing the share price to rise.

• Market Volatility: Increased market volatility can lead to higher demand for safe-haven assets, including some fixed-income investments. OXLC's assets could become more appealing during turbulent times, potentially boosting its share price.

• Short Squeeze: In a short squeeze scenario, if there's a sudden and significant rise in OXLC's share price, short sellers may be forced to cover their positions by buying shares, further driving up the price.

• Regulatory Changes: Changes in regulations that impact the fund's operations or tax treatment could affect its performance and attractiveness to investors.

• Dividend Announcements: OXLC's dividend payments can influence investor perception. Positive dividend news, such as a special dividend or higher-than-expected regular dividends, could lead to increased buying interest.

Final Thoughts

Appearances can often be misleading in the stock market. Many companies create an image that is likely to sell shares. Since so many retirees are looking for income, high yield stocks are often highly sought after. Some of these opportunities can be a literal gold mine and others are more akin to a V enus fly trap.

In regards to Oxford Lane, there are two major concerns that would make it impossible for me to recommend. High fees can only be justified by above market returns. Oxford Lane fails this test. The high fees and expenses are a constant drag on performance. Without the fees, Oxford Capital would present a fair investment opportunity. With the fees the average annual return is a mere 3.4%. I am not willing to trade high dividend payments for a low total return and neither should you. This is not a buy the dip opportunity, it is a ride the slide opportunity. The difference is this stock acts more like a one way escalator downward than an elevator that can rise from its falls.

Shares are also unlikely to recover to previous levels because of the consistently dropping NAV. The likelihood of NAV dropping in the short term is very high. Although we believe that the current yield might create a current floor for the stock price, any future dividend cuts will likely cause a substantial drop in price and hurt your income. At the end of the day, Pink Sands recommends Oxford Capital as a short term hold and a long term sell. I would like to remind my readers that chasing high yield stocks often ends badly. Despite the many fearless income oriented investors that tout the benefits of these types of opportunities, I personally believe you would be better off investing in treasuries or corporate debt. As always, please do your own due diligence before buying any stocks and good luck investing.

managed by Oxford Lane Management LLC, venturing into the realm of fixed income securities. With its inception on June 9, 2010, this United States-domiciled fund's focus lies in investing in securitization vehicles, which, in turn, target senior secured loans extended to companies with sub-investment grade or unrated debt. The fund's mission is to optimize risk-adjusted returns, currently achieved by delving into structured finance investments, particularly the equity and junior debt segments of collateralized loan obligation ((CLO)) vehicles. These CLOs are substantially backed by a diverse portfolio of senior secured loans issued to companies sporting unrated or below-investment-grade debt.

Since 2011, Oxford Lane shares have lost 74% of their value, falling from over $19 to today’s value of just over $5.

Throughout this period Oxford Lane has also returned $22.53 in dividends. The good news is that long term shareholders have not lost money. The bad news is that the dividend has been cut numerous times and the total return over the last 12 years is about 41%. Annually this works out to 3.4% total return. Throughout this time the dividend clearly has not made up for the loss of capital.

In closed end funds, you typically have to look at the NAV and I like to look at the expense ratio. A huge red flag to me is the current 12.45% expense ratio. This ratio seems unseemingly high compared to peers like Eagle Point Credit Co LLC which has an expense ratio of 9.53%.

These high fees have definitely been a big drag on performance and will continue to be a headwind for investors.

In February of 2022, Oxford had a NAV of around $7 as shown here which was a 6% decline from the month prior. Today the NAV is around $4.70 as highlighted in this recent news release . So in 19 months Oxford Lane has lost 33% of its NAV.

Potential Upside Risks

• Market Sentiment: Sentiment in the financial markets can change rapidly. If there's a positive shift in sentiment towards high-yield or leveraged credit instruments, OXLC's share price could rise as investors seek higher yields.

• Interest Rate Changes: Fixed-income investments like the ones held by OXLC are highly sensitive to interest rate movements. If interest rates decline, the value of OXLC's income-producing assets could increase, potentially driving its share price up.

• Credit Quality Improvement: If the credit quality of the underlying loans in OXLC's portfolio improves, it could result in higher valuations for those assets. This, in turn, could lead to a rise in OXLC's net asset value and share price.

• Earnings Surprises: OXLC's financial performance and dividend payments can impact its share price. Positive earnings surprises or dividend increases might attract more investors, causing the share price to rise.

• Market Volatility: Increased market volatility can lead to higher demand for safe-haven assets, including some fixed-income investments. OXLC's assets could become more appealing during turbulent times, potentially boosting its share price.

• Short Squeeze: In a short squeeze scenario, if there's a sudden and significant rise in OXLC's share price, short sellers may be forced to cover their positions by buying shares, further driving up the price.

• Regulatory Changes: Changes in regulations that impact the fund's operations or tax treatment could affect its performance and attractiveness to investors.

• Dividend Announcements: OXLC's dividend payments can influence investor perception. Positive dividend news, such as a special dividend or higher-than-expected regular dividends, could lead to increased buying interest.

Final Thoughts

Appearances can often be misleading in the stock market. Many companies create an image that is likely to sell shares. Since so many retirees are looking for income, high yield stocks are often highly sought after. Some of these opportunities can be a literal gold mine and others are more akin to a V enus fly trap.

In regards to Oxford Lane, there are two major concerns that would make it impossible for me to recommend. High fees can only be justified by above market returns. Oxford Lane fails this test. The high fees and expenses are a constant drag on performance. Without the fees, Oxford Capital would present a fair investment opportunity. With the fees the average annual return is a mere 3.4%. I am not willing to trade high dividend payments for a low total return and neither should you. This is not a buy the dip opportunity, it is a ride the slide opportunity. The difference is this stock acts more like a one way escalator downward than an elevator that can rise from its falls.

Shares are also unlikely to recover to previous levels because of the consistently dropping NAV. In our opinion, the likelihood of NAV dropping in the short term is very high. Although we believe that the current yield might create a current floor for the stock price, any future dividend cuts will likely cause a substantial drop in price and hurt your income. At the end of the day, Pink Sands recommends Oxford Capital as a short term hold and a long term sell. I would like to remind my readers that chasing high yield stocks often ends badly. Despite the many fearless income oriented investors that tout the benefits of these types of opportunities, I personally believe you would be better off investing in treasuries or corporate debt. As always, please do your own due diligence before buying any stocks and good luck investing.

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