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What Will Drive Closed-End Funds' 2017 Performances?

PART:
1 2 3 4 5 6 7 8 9 10
Part 6
What Will Drive Closed-End Funds' 2017 Performances? PART 6 OF 10

Prospect, Arlington Reward Shareholders with High Dividend Yields

Dividend yields

Closed-end companies (PEX) tend to pay higher dividends, with dividend payout ratios in the range of 70%–100%. These companies have dividend yields in the range of 9%–18%, higher than those of alternative asset managers.

Prospect Capital (PSEC) saw higher originations in fiscal 1Q17 following consistent net exits over the past few quarters. Its interest and other income are expected to rise in the upcoming quarters as it deploys more capital toward new investments. Prospect’s ~12.6% dividend yield is among the highest compared to its other investment management peers.

Prospect, Arlington Reward Shareholders with High Dividend Yields

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In comparison, smaller closed-end fund Arlington Asset Management (AI) has a dividend yield of 16%. Among alternative asset managers, Blackstone (BX) and Carlyle (CG) have dividend yields in the range of 4%–8%.

Ares Capital and BlackRock Capital

Ares Capital (ARCC) paid a dividend of $0.38 per share in 3Q16, in line with its dividends paid the year before. With a dividend yield of ~9.5% and improving portfolio yields, Ares Capital may provide better returns to its investors over the next few quarters.

In comparison, BlackRock Capital Investment (BKCC) has performed well and carries a dividend yield of 11.5%. The company has focused on its net investment income growth and quality investments.

Valuations

Prospect Capital is currently trading at 7.5x on a one-year forward earnings basis. Prospect Capital’s valuation gap has widened over the past quarter due to a pullback in its stock, mainly due to weak operating performance. In fiscal 1Q17, its yields fell marginally, but its net originations turned positive.

Ares Capital (ARCC) is trading at 9.6x on a one-year forward earnings basis. Historically, the company has traded at a premium due to its quality portfolio and SSLP (senior secured loan program) partnership with GE Capital.

Apollo Investment (AINV) is trading at 8.5x on a one-year forward earnings basis. The company has traded at a discount to its peers due to its weak operating performance and higher unrealized losses.

In the next part of this series, we’ll study origination strategies and new ways of expanding business.

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