2023-11-08 07:20:32 ET
Summary
- Blue Owl Capital runs a unique fee centric model, which gives it a number of competitive advantages.
- During the most recent earnings call, management has admitted that they may not hit their target of $1 per share dividend by 2025.
- I present the implications and my (realistic) expectations for the stock.
Dear readers,
Blue Owl Capital (OWL) is one of my larger holdings and a company I've written about quite extensively, most recently here . It's not often that you get to a buy a company with 20% growth prospects and an already high dividend of 5%+ and at a very reasonable valuation of 15x earnings. This trifecta led me to accumulate a very significant position just above $10 per share.
Given the size of the position OWL has been one of the most rewarding stocks for me this year with a RoR of about 30% to date. Still, I continue to believe that there's substantial upside on the table here and OWL remains one of the best positioned asset managers in the current high interest rate environment, along with my second favorite pick Apollo Global Management (APO).
Recall that OWL operates in three segments - private credit ($80 Billion in AUM), strategic capital ($50 Billion in AUM) and real estate ($26 Billion in AUM).
Blackstone's (BX) recent earnings have showed quite clearly that private credit and insurance are the best performing sectors today. Private credit benefits from a high interest rate environment and a tight lending market because as borrowers have a harder time getting financing from banks, they turn to asset managers instead. OWL's private credit segment as well as strategic capital, which looks to invest in companies through a combination of debt and equity, is very likely to benefit from growth of the sector. On top of this, the real estate segment owns arguably one of the best net lease portfolios in the country, Warren Buffet's favorite - the former STORE Capital portfolio.
Recent Results
The company has released their Q3 2023 earnings recently. Earnings per share came in as expected at $0.16 per share with distributable earnings a cent higher at $0.17 per share. These results very driven by decent QoQ Fee-bearing AUM growth of 3.6%. As a result, Fee-related earnings (FRE) have increased by a similar amount and reached $412 Million.
I also want to point out that OWL has maintained their 60% margin and their 1.5% average fee, which is about 50% above the industry standard and a key advantage that the company enjoys. The reason for their ability to charge a higher fee is the unique nature of their private credit products.
If we zoom out a little bit, OWL's FRE centric model has proven over the 10 quarters that the company has been public, that it generates very predictable earnings, despite macroeconomic headwinds, which have been significant. A key advantage that OWL enjoys is that a very high percentage (79%) of their capital is permanent. That means that newly raised capital is mostly additive rather than replacing old assets. This is best represented by the inflow to outflow ratio of nearly 5x. That means that for every $1 of outflows, OWL has raised $5. For comparison, BX's inflow to outflow ratio stood at 2.77x in Q3. That's a huge difference which gives OWL a major advantage.
We already know that the fundraising environment is quite tough these days. But OWL has continued to see solid demand for its strategies with $2.9 Billion raised in Q3 (vs $2.9 Billion in Q2 and $3.8 Billion in Q1), which made OWL the second-best fundraiser in the industry over the past 12 months. A significant part of this came from the recently announced $1 Billion raise from Abu Dhabi's sovereign fund, which is the latest vote of confidence for OWL.
OWL has designed its unique FRE centric model with investors (shareholders) in mind and call it an Asset Manager 3.0. The model is unique thanks to (1) the ability to provide a steady stream of management fee driven earnings, (2) robust growth and (3) much stickier fees due to a high portion of permanent capital. These characteristic make for very reliable and growing dividends, which have been the north star for OWL. The company has grown its dividend by 22% YoY in 2023 as it stands at $0.56 per share.
Since OWL's Investor Day last year, management has targeted a $1 dividend by 2025 which would represent growth of 30%+ in the following two years. During the most recent earnings call , the CEO has confirmed that their target hasn't changed, but has admitted that it's very ambitious given the recent macroeconomic headwinds. I actually like his answer and at the end of the day, it doesn't matter if OWL hits the target or comes up a little short of it. What matters is that it's able to grow its FRE by 15%+ annually and so far that seem very likely.
Valuation
At $13 per share, OWL now trades at 20x Fee-related earnings. That's below 22x for BAM and 25x for Blackstone. I like OWL's model a lot and am happy paying a little extra for their competitive advantages such as higher average fees and more durable fees. At the same time, we must recognize that it is a much younger company and one that has yet to prove itself in the public markets. Therefore I continue to see a 20x FRE multiple as fair at this time.
Going forward, investors can count on a 4.3% dividend yield. All else will depend on OWL's ability to grow. I have no doubt that management will grow their AUM and management fees over the next two years. The $1 per share dividend which corresponds to 30-35% annual growth seems like a stretch at this point, but even at just half the growth, the upside is still very significant here.
Below is a sensitivity table which calculates price upside until 2025 (without dividends) under various growth and exit multiple assumptions. Feel free to go through table and use your own assumptions. Personally, my conservative (low-end) target assumes 15% growth and 20x FRE valuation multiple and yields 32% upside over two years on top of 8.6% in dividends. That's a total annual return of 20%, which is more than enough to rate the stock a BUY here at $13 per share.
Note: I find these sensitivity tables very helpful. Please let me know in the comments below if you do too, so I know if to include them going forward.
For further details see:
Blue Owl: $1 Dividend By 2025 Likely A Stretch, But Upside Remains Significant