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Prospect Capital’s Distributable Income Beat Its Payouts

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High yields

Prospect Capital’s (PSEC) stock has fallen by ~10% over the past six months and ~24% over the past 12 months. The company’s net profits fell by 8% in fiscal 1Q16 (September end 2015) as compared to the prior year’s quarter.

The company saw higher yields and lower originations in the September quarter. The company generated distributable income of $94.0 million or $0.26 per weighted average share, exceeding $0.25 per share of dividends.

Its ~13.8% dividend yield is the highest of its investment management peers. Here’s how some of these companies’ dividend yields compare:

  • Apollo Investment (AINV): 10.4%
  • Ares Capital (ARCC): 9.6%
  • Blackstone (BX): 7.2%
  • KKR & Company (KKR): 8%

Together, these companies form 5.9% of the PowerShares Global Listed Private Equity ETF (PSP).

Lower yields on senior subordinated debt offerings to middle-market entities had a negative impact on Prospect Capital’s stock. However, second quarter results show that Prospect Capital’s annualized performance yield has increased, reflecting its strategic acquisition of higher-yielding assets.

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Discounted valuations

Prospect Capital is currently trading at 7.0x on a one-year forward earnings basis. Its peers are trading at 8.8x. Its valuation gap has widened over the past few months on lower revenues and earnings.

Prospect Capital saw more exits than deployment in the current quarter. However, its yield improved on a year-over-year basis as well as on a quarter-over-quarter basis, reflecting the success of its fund deployment.

As the company successfully deploys available capital through online lending, structured credit, and other high-yielding mediums and instruments, its revenues are expected to rise along with its yields.

Historically, Prospect Capital has traded at a lower rate than its peers because of its exposure to debt funds and its higher leverage. The market tends to give a higher premium to investment management companies that invest in equities and that have marginally leveraged balance sheets.

Over the past few years, yields on debt investments have fallen due to quantitative easing, first in the United States and currently in Europe and Japan. Prospect Capital’s stock appears to be oversold, with its current price-to-earnings ratio at 9.0x, a 30% discount off its 52-week high.

Now that yields are improving, the company is tapping customers for more originations and higher dividend yields.

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