Prospect Capital Corporation (PSEC): 12.56% Yield; Ex-Dividend 4/26
Prospect Capital is a specialty finance company that operates primarily in the private equity and specialized investment categories with a focus on secured lending. The firm prefers to make small investments ($5-$50M) in small- to mid-size North American companies. Private equity companies are attractive dividend producers because they frequently revitalize or recapitalize existing businesses, thus are able to return excess cash quickly. These can be volatile firms because portfolio companies often do fail but once they have successful investments, they can pay above-average dividends.
Prospect reported another strong quarter of earnings in February and net investment income increased 172% year-over-year as the company continues to experience extraordinary growth. The current portfolio yield appreciated from 13.3% last quarter to 14.7%, highlighting the robust profitability of investments. This indicates that not only is the high dividend payment safe but that an increase is possible. In early December, Prospect increased the dividend payments by 8.2%. In June 2010, Prospect began distributing dividends monthly rather than quarterly, which accounts for the large perceived dividend decrease from $0.40 to $0.11. Private equity investments are complex due to the scale and diversity of their operations, so I strongly recommend that you read the earnings release for further details of investment activities.
The company has been very active recently and raised $250M of debt capital to facilitate additional long-term investments. One potential negative for Prospect is that it will need to replace the income generated by its Energy Solutions Holdings, Inc. investment, which generated "significant dividend and interest income" in 2012. This risk is mitigated by the $400M investment pipeline that includes "secured investments with double-digit coupons, sometimes coupled with equity upside through additional investments, diversified across multiple sectors."
The stock has lagged the market by four percent the past month and now trades substantially lower than a recent $384M net stock issuance ($11.10 per share before fees). The P/E is around eight and the yield is above 12; therefore, I am bullish on Prospect Capital's future. I continue to reiterate that I would be comfortable buying Prospect under $11.00 and the stock has only appreciated one percent in 2013 thus far. The 3.2% decline in the past month has pushed PSEC's price-to-book ratio slightly below 1.0 and the stock is attractively valued.
In January, Prospect announced that it would be diversifying its investments into the real estate market with three investments totaling $50M. President Grier Eliasek stated that "while our initial real estate investments have been in industrial and multi-family residential properties, Prospect is interested in all types of direct and indirect real estate investments, including properties owned by private equity-owned companies." Prospect might be late to the game, but I believe this diversification will ultimately improve the quality of the company.