Dividend Investments: Deconstructing Prospect Capital

  • Dividend Investments
  • 3 Months ago
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Prospect Capital Corporation is a closed-end financial services company that provides debt and equity to middle market private companies. The focus is primarily on sponsor-backed transactions and direct lending to established owner-operated companies. Strategically, it targets companies in need of capital for activities such as acquisitions, divestitures, growth, and other activities.

The shares have rallied over the past year after an especially tumultuous first couple of months in 2016. The market price has gained more than 40% over the past year. In fact, the market price and the NAV are almost the same. It is interesting to note that this is the first time in years that the NAV and market price have been close. Earnings-per-share is currently 0.99, up significantly from a year prior, and the Price-Earnings ratio is 9.55. The PSEC debt to equity ratio was decreased to 76.2% by year end 2016 as they repaid a large convertible note.

A year ago, when the energy sector was fledging the high yield market was not attractive. Since then, many energy companies have sought to lower debt and strengthen their balance sheets. Investors have generally shifted to higher yield vehicles recently with renewed optimism in the sector. The optimism is driven by a general sentiment that there is a lower risk of a recession in the U.S. Strategically, Prospect Capital has been targeting second lien lending which provides higher yields. These higher yields have enabled Prospect to increase return on equity to 9.6%. The stock has outperformed the S&P 500 and reduced the volatility that other investments are making on the exchange.

The outlook on the Fund is that revenues should continue to grow steadily. The Fund is currently trading around nine times on a one year forward earnings basis whereas peers are trading higher. The Fund will continue to invest and diversify its strategies to return even higher yields. This strategy should help it continue to manage volatility. However, there is still some apprehension on the direction the stock price will go from here. Some analysts believe that its wide sum of capital movement has been somewhat adverse.

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