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How Prospect Generated Strong Yields

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Generating strong yields

Prospect Capital’s (PSEC) valuation gap has narrowed more than its industry peers’ and the broader market’s (SPX) (SPY), reflecting improved performance over the past few quarters. The company didn’t provide any further guidelines on possible spin-offs of profitable divisions in a bid to raise capital. If the stock rises, at least above the net asset value, the company can take another look at its equity dilution strategy.

Higher yields enabled Prospect to garner a higher ROE (return on equity) of ~9.6%. Here’s how a few of the company’s peers in the sector fared in terms of ROE:

  • BlackRock Capital Investment (BKCC): 12%
  • KKR & Co. (KKR): 12%
  • Ares Capital (ARCC): 8%

Interest income rises

Prospect Capital posted total interest income of $174.8 million in fiscal 2Q17, compared with $186.5 million in the corresponding quarter of the year prior. Its income fell due to net exits over the past year. However, sequentially, it rose by $3 million due to higher deployments in the September quarter. The company managed total investment income of $183 million, compared with $180 million in the previous quarter.

The company’s expenses declined sequentially as well. On a year-over-year basis, it fell to $99 million, mainly due to lower income incentive fees and general and other expenses. These factors improved its net earnings and earnings per share.

Prospect has successfully garnered origination and yield through investments in new businesses over the past few years. The company has already invested more than $350 million in new strategies, which are expected to boost revenue over the next few years. It is targeting new areas in a bid to improve yield and diversify investment holdings. In the next part of this series, we’ll study Prospect’s dividends, repurchases, and valuation in fiscal 2Q17.

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