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Pick Prospect Capital for High Dividends, Attractive Valuations

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Pick Prospect Capital for High Dividends, Attractive Valuations PART 1 OF 7

Prospect Capital Reports Earnings Decline in 3Q15

Declining net asset value

Prospect Capital (PSEC) stock has declined by approximately 14% over the past six months and by 21% over the last year, as of June. The company’s market capitalization has fallen to $2.83 billion. Its net asset value stood at $3.7 billion or $0.05 per share as of March 31.

Prospect Capital reported its 3Q15 earnings for the fiscal period ending March 31, 2015. The company missed analyst estimates by $0.02 and reported adjusted EPS (earnings per share) of $0.24.

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Third-quarter earnings declined mainly due to a decrease in structuring fees, lower origination levels, and an increase in interest and credit facility expenses. This decline was partially offset by reduced incentive management fees.

Financial services

Prospect Capital is a financial services company that lends to and invests in middle-market, privately held companies. The company acts as a close-ended fund and is regulated as a business development company. It provides capital to companies in the form of senior and subordinated debt and equity. This capital is then used for acquisitions, divestitures, growth, development, or recapitalizations.

Prospect Capital works with financial sponsors and management teams to identify investments with histories of cash flows, asset collateral, or contracted pro forma cash flows. Prospect Capital investments are made based on one of nine origination strategies:

  1. lending in private equity-sponsored transactions
  2. lending directly to companies not owned by private equity firms
  3. control investments in corporate operating companies
  4. control investments in financial companies
  5. investments in structured credit
  6. real estate investments
  7. investments in syndicated debt
  8. aircraft leasing
  9. online lending

Other investment management players

Here’s how some of Prospect Capital’s peers in investment management fared with their respective quarterly earnings:

  • Ares Capital Corporation (ARCC) – missed the estimate by 5%
  • BlackRock Capital Investment (BKCC) – beat estimates by 30%
  • Blackstone (BX) beat estimates by 32%

Together, these companies form 5.87% of the PowerShares Global Listed Private Equity Portfolio (PSP).

Here are the two major questions we’ll be investigating in this series:

  • Can Prospect Capital turn in a decent operating performance in upcoming quarters?
  • Does the firm’s current valuation make it an attractive investment option?
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