Sixth Street Specialty Lending: Strong Dividends and Promising Growth in 2023

Small Caps 3 replies 0 votes 2203 views Tags:  BDCdividend yieldFinancial Growthmarket performanceNet Investment IncomeSixth Street Specialty LendingSupplemental Dividends
Soap Khan 12 months

Sixth Street Specialty Lending, Inc. has been doing really well this year, with their common shares up 15% on a total return basis. Impressive, right?

So, what do they do? Well, they're a business development company (BDC) that focuses on providing capital to middle-market U.S. firms through senior secured loans. Pretty cool stuff.

Now, here's the exciting part – they've been paying out a solid 9.4% regular dividend yield. And get this, their fiscal 2023 first quarter net investment income covered a whopping 119% of that dividend. Talk about a strong performance!

But wait, there's more. They also have some spillover income of $0.87 per share, which is set to power future supplemental dividends through 2023 and 2024. That's definitely something to look forward to!

Now, let's talk numbers. The BDC has been paying out supplementals with $0.13 declared so far in 2023. Assuming they keep it up through the end of the year, shareholders could enjoy an extra 1.3% dividend income. That's like icing on the cake!

Of course, we can't ignore the fact that the yield has reached its highest level since 2020. And their base quarterly dividend has grown by a solid 12% from $0.41 per share to its current level.

Here's something interesting for you finance enthusiasts – their stock is currently trading at an 18% premium to net asset value per share of $16.59 as of the end of the first quarter. That's pretty remarkable!

Now, when it comes to evaluating a BDC, one of the key factors is the direction of their net asset value (NAV). TSLX has been managing its NAV pretty well, with tangible book value showing a near upward trend over the last decade. They've gone from $1.12 billion going into the pandemic to $1.36 billion as of the first quarter. Good job, TSLX!

But, like in any financial story, there are some challenges. The Fed has hiked interest rates ten consecutive times, which has boosted TSLX's net interest margins. However, it has also weighed down on market sentiment and the fair value of its loans. It's a delicate balance.

Despite the challenges, TSLX has been doing great, generating a first-quarter total investment income of $96.5 million, up 43.2% from the year-ago comparison. Impressive growth, right?

And let's not forget about the dividend coverage – the most recent regular dividend was a healthy 120% covered by first quarter net investment income. Plus, they've got some spillover income to drive even more supplementals.

So, is TSLX a buy? Well, it depends. They're a high-quality BDC with a focus on NAV growth and a growing NII and dividend payment profile. There's potential for more supplementals and a hike to the base dividend payment. But some folks are cautious, citing broader macro risks and the possibility of a recession.

However, things are looking up. Loans on non-accrual status were less than 0.7%, and Goldman Sachs recently lowered their chances of a U.S. recession to 20% from 25%. So, maybe the concerns are being overblown.

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