Blackstone Secured Lending: A 10% Yield BDC Cash Cow (NYSE:BXSL)

Blackstone Secured Loan (NYSE:BXSL) is a top BDC choice for income investors who appreciate a high-quality, well-performing investment portfolio with a very safe 10% return. Blackstone Secured Lending experienced only a minor decline in the quality of its balance sheet in second quarter and supported its dividend well with net investment income. Shares of Blackstone Secured Lending trade, deservedly, at an 11% premium to net asset value, and I see a risk profile that is heavily tilted to the upside. Investors looking to overweight quality BDCs that have a chance to maintain their dividends during a downturn may want to take a look at Blackstone Secured Lending.

Previous assessment

We rate Blackstone Secured Lending as a strong buy in June 2024 as the Federal Reserve has proven reluctant to cut the fed funds rate. rate: The Fed just made this 10% yielding BDC a strong buy. Blackstone Secured Lending saw a slight increase in its non-accrual percentage last quarter, but at 0.3% on a fair value basis, it’s high compared to most BDCs. The 10% yield is also well supported by net investment income, and I think Blackstone Secured Lending is a very compelling idea for income investors, especially those looking to prepare for a potential recession.

Why 10% worth buying from BXSL

Blackstone Secured Lending primarily pursues a first-lien investment strategy because the BDC’s portfolio structure includes almost exclusively variable rate loans that generate interest income for Blackstone Secured Lending.

I mentioned in my last BDC piece that I like Blackstone Secured Lending mainly because of its high balance sheet quality. The investment company has very strict underwriting procedures and therefore avoided the pitfalls that so many other BDCs have fallen into: making more loans just to grow the portfolio.

Blackstone Secured Lending’s non-accrual ratio, which measures the amount of bad loans that are at risk of being written off (or sold), was 0.3% at the end of June. Non-accrual interest fell quarter-over-quarter by 0.2% PP, but the first collateral portfolio is mostly performing. BDCs, for the most part, have non-accumulating percentages of 1.0% or higher. Because the portfolio is performing very well overall, Blackstone Secured Lending reported no investment losses in the second quarter.

Blackstone Secured Lending generated net investment income of $173 million in Q2’24, showing 4% quarter-on-quarter growth. BDC’s net investment income increased mainly due to a 20 MQ/T increase in interest income. Blackstone Secured Lending, as we indicated in the previous paragraph, also avoided investment losses in the second quarter — BDC actually posted realized and unrealized earnings of $0.12 per share, net in Q2’24 — which supports my statement I see. BXSL as a top quality investment choice in the industry.

Returning to Blackstone Secured Lending’s distribution coverage profile.

Blackstone Secured Lending’s net investment income of $0.89/share in Q2’24, calculated at a dividend coverage ratio of 1.16X, compared to 1.13X in Q1’24. BDC currently pays a quarterly dividend of $0.77/share, which I expect it to achieve going forward. Blackstone Secured Lending has consistently backed its dividend with net investment income over the years, making BXSL a particularly reliable dividend payer. Blackstone Secured Lending stock is currently yielding 10.3%.

BXSL evaluation

If there is a BDC worth trading at a premium valuation, it would be Blackstone Secured Lending, in my opinion. BDC manages its portfolio well, has excellent credit underwriting (a low non-accrual percentage), and supports its dividends well with net investment income.

Blackstone Secured Lending is currently priced at a P/NAV ratio of 1.11X, while rival BDCs for the most part trade considerably closer to their respective net asset values. Blue Owl Capital (OBDC), which has a merger and revaluation catalyst, is even trading at a 3% discount to its last reported net asset value. Ares Capital (ARCC), long considered the gold standard in the BDC industry, has a P/NAV of 6%. I recommend Ares Capital mainly because of BDC’s long history of delivering consistent financial results (in terms of portfolio performance and dividend coverage): A top BDC for troubled times.

Shares of Blackstone Secured Lending trade just above its long-term (5-year) average P/NAV ratio of 1.05X, indicating that income investors are willing to reward the BDC for its predictable, high-quality growth. In my last paper I argued that I saw a fair P/NAV for Blackstone Secured Lending of 1.25X given the superior quality of the BDC portfolio/balance sheet and the well-supported dividend. I confirm my Strong Buy rating on BXSL and increase my Fair Value to $33.99 per share (up from $33.60 due to Q/Q increase in net asset value).

Risks with Blackstone Secured Loans

BDC is heavily invested in loans that pay variable rates, thus posing a risk to Blackstone Secured Lending’s net investment income in a lower-rate world. However, the main reason I think BXSL is a strong buy is the superior quality of the investment company’s assets, and BDC has enough excess dividend coverage to suggest the dividend is not in imminent danger. Therefore, the only factor that would cause me to change my mind about Blackstone Secured Lending is if BDC were to see an unexpected and drastic increase in its outstanding percentage and a deterioration in its dividend coverage profile.

Final thoughts

In my opinion, buying shares of Blackstone Secured Lending is a solid decision for investors looking to regain high quality dividend income. Blackstone Secured Lending trades above the long-term P/NAV ratio, but the premium is well-deserved because the portfolio is performing well and the non-accrual percentage is very low, indicating superior asset quality. Dividends appear to be well supported by net investment income (both short- and long-term), and Blackstone Secured Lending, given its first-lien strategy, is a 10% yielding BDC cash cow with the potential to increase the dividend in the future. .