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.