Blue Owl Capital: Great Dividend Growth Potential Ahead (OWL)

Overview

Let’s talk about Blue Owl Capital (NYSE:OWL), a company that I believe has the potential to perform exceptionally well in the market for years to come. I believe that Blue Owl Capital is a strong contender to offer investors double-digit returns based on the following two reasons:

1. Excellent Dividend Growth Potential
2. Strong Financials – Earnings

Blue Owl Capital operates as an asset management firm, specializing in providing lasting financial solutions. Their headquarters are in New York and the stock has a short history, only going back to May of 2021. Their strategy caters to middle-market companies and corporate real estate players. They offer a range of financial products and services, and their impressive assets under management (AUM) growth has been stellar.

As an investor that values the income provided from my investments, the top reason that I am considering buying OWL is because of the confirmed dividend expectation of $1 per share by 2025. From the current dividend level, this would represent a 78% growth in the dividend distribution. Alongside this, I believe the company’s strong and continued financial excellence will propel the price upwards over time.

Revenue Buckets

Blue Owl Capital is an alternative asset manager that operates through various different platforms. Most of the company’s assets are permanent capital, allowing them to focus on long-term value-generating opportunities. However, their focus is within three specific investment platforms: Credit, Strategic Capital, and Real Estate. Owl’s top-tier credit enterprise manages $73.8 billion in assets under management. This $73.8 billion actually represents a 30% increase over the prior year. This increase was driven by capital raised employing their lending strategies. Their core focus is on providing loans to middle and upper-middle market companies, whether supported by private equity or not.

Next, they are a leading strategic capital provider for participants in the private market, boasting $50.9 billion in AUM in this strategic division. They have established deep and extensive relationships within the alternative asset management ecosystem and have a successful track record, having completed over 80 equity transactions.

Lastly, OWL is building up positions to become a serious player in the private equity real estate sector, overseeing $24.8 billion in AUM. The $24.8 billion represents an insane 49% increase over the prior year, which was primarily driven by capital raised in their Blue Owl Real Estate Fund & Blue Owl Real Estate Net Lease Trust. Their primary focus is on the acquisition of top-tier assets leased to investment-grade and creditworthy entities.

OWL has had some impressive AUM (asset under management) growth of 26% year over year, now managing $149B. Total fundraise has grown 19% YoY as well. Management also has an eye for quality because they recently acquired STORE Capital, a real estate investment trust that I once owned, for $15 billion.

They place a strong emphasis on credit quality and are selective, closing only about 5% of evaluated deals. The average maturity of outstanding notes sits at 13 years. Their credit quality is rated BBB by S&P & Fitch and their available liquidity sits around $1.3B.

Earnings Indicate Great Momentum

OWL reported profit of $12.9 million, which translates to $0.03 per basic share and $0.02 for each diluted Class A share. They also earned $244.6 million in fees, equal to $0.17 per adjusted share, and had $227.0 million in distributable earnings, or $0.16 per adjusted share. As previously mentioned, their total assets under management reached $149.6 billion, a 26% increase over the year prior. The growth was mainly due to the capital raised throughout the company and its allocation in the Credit sector.

Within that, they have $93.6 billion in assets from their clients, which went up 21% from the previous year. They also have $118.6 billion in permanent capital, which represent a 24% increase and grows the margin of safety. There’s an additional $12.0 billion in assets that will start generating management fees, expected to be about $170 million annually once they’re in use. Lastly, the company raised $2.9 billion in new equity capital during the quarter, and they deployed $2.5 billion in assets.

That was a mouthful of different growth metrics, but I do believe that it paints a positive picture on the forward-looking value of OWL. A combination of the management fees eventually kicking in alongside all of this newly deployed capital earning interest, means that we should have a profitable future ahead of us. Management has been very active and transparent with their growth strategies.

On the latest earnings call, we were reassured by management that strong growth is expected going into the foreseeable future. I strongly believe that continued growth is likely because OWL maintains a robust capital position. Their balance sheet looks solid with an average 13-year maturity and a favorable 3% cost of borrowing. Statements from the CEO on that earnings call indicated that they were on course to meet a target of $1 billion in distributable earnings and $50 billion in fee-paying assets under management.

We are very pleased with our results. We delivered exceptional growth in all of our key metrics. AUM, fee-paying AUM, management fees, FRE, and DE, and expect to see continued strong growth for the foreseeable future. – Alan Kirshenbaum, Chief Financial Officer

Importance Of Fee Related Earnings

FREs (fee related earnings) are really important for asset managers as they make up a substantial portion of their revenue. FREs offers financial stability through recurring management and performance fees, which were implemented to protect in downward markets. This metric is crucial for assessing profitability, attracting investors, benchmarking against competitors, and aligning the interests of asset managers with their clients. Regulatory requirements also mandate FRE disclosure, enhancing transparency and providing valuable insights into a firm’s financial health and fee structures. In essence, FRE is a key indicator of an asset management company’s financial performance and overall value.

In the case of OWL, their FRE increased by 24% year-over-year to $245 million per quarter, equivalent to $0.17 per share. This growth was fueled by double-digit growth in AUM and a consistent gross margin of over 60%. Lastly, we can take a look at their FCF (free cash flow) as additional confirmation of their ability to generate reoccurring income.

Dividend Growth

Based on the latest declared quarterly dividend of $0.14 per share, the current yield sits at 4%. As I’ve previously mentioned, OWL has a short history, so the dividend trail isn’t something we can quite comment on right now. The growth so far has been very strong and attractive. Their latest announced raise of 7.7% came in only a few months ago, and we can expect a lot more raises into the future in my opinion.

However, the current dividend payments are not what I am looking forward to. As part of their last earnings call, the company’s CEO has confirmed a plan to aim for a dividend of $1 per share by 2025. For reference, the current annual dividend payout (FWD) is $0.56 per share.

Standing here today, we continue to see our path in achieving a $1 per share dividend for 2025, driven by continued strong FRE growth anticipated for the next two and a half years.

We are very pleased with our results. We delivered exceptional growth in all of our key metrics. AUM, fee-paying AUM, management fees, FRE, and DE, and expect to see continued strong growth for the foreseeable future. – Alan Kirshenbaum, Chief Financial Officer

If I understand correctly, this means that we should look forward to a 78% growth in the dividend within about a two-year period. This growth would most likely be driven by the continued growth of AUM. As previously mentioned, their AUM has grown 26% YoY.

At the current price of $13/share, if we invested $10,000 that would net us 769 shares. This means that our current 769 shares would result in an estimated dividend payment of $430 annually.

769 shares x $0.56.share annual payout = $430 in dividend income.

If the dividend increased to $1/share by the end of 2025, this means your same $10,000 investment would now be netting you $769 dollars in dividend income. In theory, this would represent a yield on cost of roughly 7.7%.

Risks

While Blue Owl seems promising, it’s essential to remember that setbacks are possible. The dividend growth plan is aggressive and relies on continue growth on the total value of assets under management. If AUM growth slows, the desired dividend of $1/share may not be achieved by 2025. Any shift in outlook may result in a price swing reacting on the news. Although slowed AUM growth is possible in the future, we currently have no indication of slowing that is cause for concern. I plan to continue revisiting OWL well into the future and maintain an eye on the AUM growth.

Takeaway

Blue Owl Capital presents a compelling investment opportunity with the potential for double-digit returns. Their strength lies in their robust dividend growth plan, which aims to increase the dividend to $1 per share by 2025, marking a substantial 78% growth. Additionally, OWL’s sound financials, evident through their impressive fee-related earnings (FRE) growth and substantial assets under management expansion

With a diverse investment portfolio spanning credit, strategic capital, and real estate, OWL has demonstrated a knack for identifying unique opportunities and building strong relationships in the alternative asset management ecosystem. However, it’s crucial to acknowledge that while the future appears promising, potential risks lie in the pace of AUM growth, which may impact the ambitious dividend target. Monitoring AUM growth will be paramount in assessing OWL’s progress in achieving its dividend goals. Overall, I believe Blue Owl Capital presents an exciting journey for investors, offering the prospect of a steady income stream and capital appreciation.