Get Monthly Income from Prospect Capital (PSEC)

Prospect Capital Corporation (PSEC) is a financial services company that lends to and invests in middle market privately-held companies. The Company is a closed-end investment company. The Company invests primarily in senior and subordinated debt and equity of companies in need of capital for acquisitions, divestitures, growth, development, project financing and recapitalization. The Company’s investment objective is to generate both current income and long-term capital appreciation through debt and equity investments. It focuses on making investments in private companies, and many of its investments are in energy companies. The Company’s investment adviser is Prospect Capital Management LLC. On December 2, 2009, the Company completed the acquisition of Patriot Capital Funding, Inc. (Patriot), whereby Patriot merged with and into the Company.

Prospect Capital Corporation (NYSE: PSEC) is a business development company (BDC). BDCs have to pay out 90% of their distributable cash flow in dividends. In exchange for paying out most of their earnings in dividends, they pay no corporate income taxes.

Other companies that have a similar deal with the government – real estate investment trusts, for example – have large amounts of debt. But as a BDC, Prospect isn’t allowed to borrow too much money. The Investment Company Act of 1940 requires BDCs to have assets totaling at least 200% of their debt at all times.

Most of Prospect’s loans earn interest of between 10% and 15%. Some are as high as 18%. Others are in the range of 7%-9%. Overall, Prospect’s investment portfolio yields about 13% as of company reports.

On May 10, 2011 Prospect Capital (NASDAQ:PSEC) reported earnings and analysts, on average, expected earnings of $0.26 on sales of $40.9 million. Prospect Capital actually reported earnings of $0.27 per share on sales of $54.4 million, beating EPS estimates by $0.02 and beating revenue estimates by $13.5 million.

Prospect continues to grow as it makes new loans to other companies.  Prospect has invested $32 million of senior debt, subordinated debt, and equity in an advertising media buying business.  Of Prospect’s $32 million total investment, $24 million is structured as senior secured debt, $3 million as subordinated debt, and $4 million as controlling equity.   All of the media Company’s managers will remain with the business.  Separately, Prospect provided $15 million in secured second lien acquisition financing for a top company in the in-store media industry.  Prospect also provided $15 million in secured second lien financing for the recapitalization of a leading company in the engineered glass materials industry.  Prospect has closed more than $410 million of new originations since December 31, 2010.

Prospect pays its common stock dividend monthly. Right now, it’s paying $1.22 per share in dividends per year, $0.103 per share per month. With the stock around $11.30 a share, that’s a current yield of just under 11%. The 5-year dividend growth rate is 28.47% as the dividend grows when PSEC makes more income from loans.  Current book value per share is $10.33 so PSEC is trading at a 9% premium to book value.

Leave a Comment