Higher dividend payouts
Closed-end funds (PEX) tend to pay higher dividends, with dividend payout ratios in the range of 70%–90%, and related companies tend to have dividend yields in the range of 9%–20%.
In particular, Prospect Capital (PSEC) saw higher yields and lower originations in the March quarter. Prospect generated distributable income of $86.6 million, or $0.24 per weighted average share. In the first nine months of its fiscal 2016, Prospect generated distributions of $0.80 per share, as compared to dividends of $0.75 per share. PSEC’s ~13.0% dividend yield is the highest among its investment management peers.
By comparison, smaller closed-end funds like Arlington Asset Management (AI) and Apollo Investment (AINV) have dividend yields of 18% and 15%, respectively. Alternative asset managers like Blackstone (BX) and Carlyle (CG) have dividend yields in the range of 4%–7%.
Ares Capital and BlackRock
Ares Capital (ARCC) paid a dividend of $0.38 per share during the first quarter of 2016, which was on par with the dividend it paid the year before. With a dividend yield of ~11% and improving portfolio yields, the company may provide better returns to its shareholders over the next few quarters.
By comparison, BlackRock Capital Investment (BKCC) has performed well and carries a dividend yield of 10.9%. The company has focused on its net investment income growth and quality investments.
Funds deploying higher leverages have seen sell-offs during the past one year. But this has been due to the expectation of further interest rate hikes by the Fed, which results in lower valuations.
Prospect Capital is currently trading at 7.7x on a one-year forward earnings basis. Overall, the industry is trading at 8.1x on a one-year forward basis. Ares Capital is trading at 9.7x on a one-year forward earnings basis. Historically, the company has traded at a premium to its peers due to its quality portfolio and strategic partnership with GE Capital. Ares Capital has improved its average yield by investing in the second lien debt of companies with strong earnings profiles.
In the next part of this series, we’ll look at the particular approaches that asset managers of closed-end funds have been taking.