Prospect Capital’s Quarter a Buying Opportunity

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Source: Thinkstock

Source: Thinkstock

Everybody needs to own a solid dividend payer. In my prior articles, I have made recommendations for some real estate investment trusts — my two favorite being Annaly (NYSE:NLY) and Javelin Mortgage (NYSE:JMI). I continue to recommend both at current levels as its dividends are secure and earnings have been strong.

One stock I have owned since the summer of 2013 is a business development company, or BDC. The company is Prospect Capital (NASDAQ:PSEC), whose primary operations involve lending money to small companies to help them grow and expand, while being paid back with interest. In a way, it is similar to a venture capital fund. The stock has been solid. It has traded in a range of $10.00 to $12.00 for years. A solid strategy has been to buy on the dips and reinvest the dividends to compound the investment. The best part? This stock sports a 12 percent yield and pays monthly dividends.

Further, after declaring dividends for the remainder of 2014, it will have paid out 74 consecutive payments. The dividends are being raised topping out at 11.0600 cents per share in December 2014. The purpose of this article is to highlight the key points of the quarterly report and discuss why today’s pull back is an opportunity.

Signs of strength

At the time of this writing, Prospect Capital is down 5 percent to $10.24. It is in response to the company’s quarterly report, which overall was strong but some saw as disappointing. For the quarter, Prospect Capital saw a net increase in net assets resulting from operations of $82.1 million or $0.26 per weighted average number of shares. In the comparable year ago quarter, Prospect Capital saw $44.4 million or $0.20 per weighted average number of shares for the quarter. Thus, the net increase in net assets increased year-over-year by 84.8 percent and 30.0 percent on a dollars and per share basis, respectively. Net investment income, or NII, was $98.5 million or $0.31 per weighted average number of shares for the quarter. For comparable 2013 quarter, Prospect Capital’s NII was $59.6 million or $0.26 per weighted average number of shares for the quarter. Thus, NII increased year-over-year by 65.3 percent and 19.2 percet on a dollars and per share basis, respectively.

As mentioned above, Prospect Capital is increasing monthly cash distributions to shareholders through December 2014, ranging from 11.0425 cents per share for May 2014 to 11.0600 cents per share for December 2014. Prospect’s current stock price of $10.24 as of May 5, 2014 delivers to shareholders a current dividend yield of 12.7 percent. Prospect Capital is able to raise the dividends because the company generated cumulative NII in excess of cumulative distributions to shareholders since Prospect’s initial public offering (IPO) ten years ago.

For the June 2013 fiscal year, Prospect Capital’s NII in excess of distributions to shareholders was $53.4 million and $0.26 per share. For the nine months ended March 31, 2014, distributions were in excess of NII by $16.8 million and $0.04 per share, distributing some of the excess, which was built up in the previous two fiscal years. Since Prospect Capital’s IPO ten years ago, the company will have distributed $13.26 per share to initial shareholders and over $1.3 billion in cumulative distributions to all shareholders by the end of 2014.

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