Prospect Capital Stock: High Dividend Yields, Lower Valuations
Prospect Capital’s (PSEC) stock has declined by ~13% over the past six months and ~27% over the past 12 months. However, the company’s stock has risen by 5% since the announcement of its 4Q15 earnings, reflecting its strong operating performance. Its net profits rose by 24%—beating analyst estimates—mainly as a result of adding higher-yield investments to its portfolio. The company also declared $0.25 in dividends per share in 4Q15.
Interested in AINV? Don't miss the next report.
Receive e-mail alerts for new research on AINV
Its ~13.3% 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 Corporation (ARCC): 9.6%
- Blackstone (BX): 7.2%
- KKR & Co. (KKR): 8%
Together, these companies form 5.87% of the PowerShares Global Listed Private Equity Portfolio (PSP).
Lower yields on senior subordinated debt offerings to middle-market entities had a negative impact on Prospect Capital’s stock. But second quarter results show that Prospect Capital’s annualized performance yield has increased, reflecting their strategic acquisition of higher-yielding assets.
Prospect Capital is currently trading at 7.4x on a one-year forward earnings basis. Its peers are trading at 8.7x.
Historically, Prospect Capital has traded at a lower rate than its peers because of its exposure to debt funds and 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.
Prospect Capital has increased its leverage significantly in 1H15. With a debt-to-equity ratio of 77.6%, the company’s debt with long-term maturity could significantly enhance value for investors.
Over the past few years, yields on debt investments have declined due to quantitative easing, first in the United States and currently in Europe and Japan. Prospect Capital stock appears to be oversold with its current price-to-earnings ratio at 7.8x and 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.
Over the longer term, the stock could give a higher return.