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The focus of this article is to provide a detailed analysis with supporting documentation (via four tests) on the dividend sustainability of Prospect Capital Corp. (NASDAQ:PSEC). This analysis will be performed after a brief discussion regarding the following topics in relation to PSEC: 1) general business overview; and 2) regulated investment company ('RIC') classification per the Internal Revenue Code ('IRC').

Understanding the tax and dividend payout characteristics of PSEC will provide investors with an overall better understanding of the business development company ('BDC') sector as a whole. Due to the fact PSEC has produced an annual dividend yield between 10% - 13% over the past several years, many investors have chosen this stock (including other stocks within the BDC sector) for income-producing equity investments. From reading this article, investors will better understand how a RIC comes up with its current dividend rate and specific signs when an impending dividend raise or cut should be implemented.

I will be performing four dividend sustainability tests within this article. The first part of PSEC's dividend sustainability analysis will perform two tests and focus on its investment company net taxable income component. These two tests will be termed "TEST 1" and "TEST 2". The second part of PSEC's dividend sustainability analysis will perform two tests and focus on its earnings per share ('EPS') and net investment income ('NII') per share components. These two tests will be termed "TEST 3" and "TEST 4".

Due to the length of the material covered, I feel it is necessary to break this particular article into two separate publications. This article will be broken-down by the following two dividend components:

PART 1: PSEC's Investment Company Net Taxable Income (TEST 1 and TEST 2)

PART 2: PSEC's EPS (TEST 3) and NII Per Share (TEST 4)

At the end of PART 1 of this publication, there will be a conclusion on my opinions about the overall dividend sustainability of PSEC from the results obtained from the first two tests. At the end of PART 2 of this publication, there will be a conclusion on my opinions about the overall dividend sustainability of PSEC from the results obtained from both parts of the article.

Side Note: A similar dividend sustainability analysis was recently performed on Fifth Street Finance Corp. (NASDAQ:FSC). Both articles have the same general structure and discussion topics. Readers who are interested in the BDC sector (especially the topic of a company's dividend sustainability) may find comparing PSEC and FSC rather useful. As such, the following link below is my recent article on FSC's dividend sustainability:

Fifth Street Finance Corp.'s Dividend Sustainability Analysis (Post Fiscal Q3 2013 Earnings)

General Business Overview:

PSEC is a BDC which primarily lends to and invests in middle market privately-held companies whose annual revenues are less than $750 million with enterprise values less than $1 billion. A typical PSEC investment has a range between $5 million and $250 million. However, a select few past investments have fallen outside this range. A majority of PSEC's investment portfolio contains first and second lien senior loans and mezzanine debt. A minor portion of PSEC's investment portfolio contains collateralized loan obligation ('CLO') investments. First and second lien senior loans are debt instruments that generally rank senior to subordinated debt of a given portfolio company. Mezzanine debt and CLO investments are subordinated to senior loans and are generally unsecured in nature.

PSEC's business objective is to maximize its portfolio's total return to investors by generating income through its debt investments and through capital appreciation from its equity investments. PSEC also receives the following income on its investment portfolio (where applicable): 1) structuring fees on newly originated deals; 2) advisory/amendment fees where additional capital is provided; 3) net profit interests; 4) overriding royalty interest revenues; 5) prepayment fees; and 6) exit fees.

The following are seven origination strategies PSEC currently has regarding its investment portfolio: 1) lending in private equity sponsored transactions; 2) lending directly to companies not owned by private equity firms; 3) control investments in corporate operating companies; 4) control investments in financial companies; 5) investments in structured credit; 6) real estate investments; and 7) investments in syndicated debt. PSEC continues to evaluate other origination strategies in the ordinary course of its business and may add additional types of investments if deemed appropriate.

From PSEC's initial public offering ('IPO') in July 2004 through the fiscal year of 2007, it invested primarily in companies related to the industrial/energy sector. Since then, PSEC has diversified its investment portfolio and continues to reduce its exposure to this particular sector. Currently, PSEC's industrial/energy sector holdings represent less than 7% of its entire investment portfolio.

Side Note: PSEC's fiscal year-end is June 30th of a given year. Therefore, PSEC's fiscal first quarter ends September 30th of a given year.

Discussion of RIC Classification per the IRC:

As a BDC, PSEC elects to be treated as a RIC under "Subchapter M" of the IRC. To continue to qualify annually as a RIC, the IRC requires PSEC to meet certain "source-of-income" and "asset diversification" requirements. These requirements are beyond the scope of this specific article and will not be mentioned again. In addition, PSEC is required to distribute annually to its shareholders at least 90% of its "investment company taxable income" and "net capital gains" in order to be eligible for the tax benefits allowed to a RIC.

Investment company taxable income is initially PSEC's "net increase (decrease) in net assets resulting from operations" figure within its "consolidated statement of operations" (income statement). However, several "book to tax" adjustments are needed to properly convert PSEC's net increase (decrease) in net assets resulting from operations figure to its investment company taxable income figure. Net capital gains consist of realized short-term net capital gains in excess of realized long-term net capital losses for each tax year. As of 12/31/2012, PSEC had a capital loss carryforward to offset any possible short-term net capital gains in future periods. This has been a continuing trend for at least the past several years as net realized capital losses on debt/equity investments have occurred. PSEC's investment company taxable income figure and net capital gains figure are combined and referred as PSEC's "investment company net taxable income" figure within this article. This figure is also known as PSEC's "annual distribution requirement". The dividend per share amount is determined by the board of directors and is partially based on PSEC's estimate of its annual distribution requirement.

Regarding its annual distribution requirement, PSEC has an additional option available if it fails the 90% distribution of its investment company net taxable income provision. PSEC is allowed to carryover its investment company net taxable income into the next calendar tax year. PSEC must distribute its remaining investment company net taxable income from the prior year via dividends declared prior to the due date of the extended tax return (September 30th of the following year). This is also known as the "spillback provision". If PSEC fails to distribute its prior year's investment company taxable income prior to September 30th of the following year, it will be declassified as a RIC per the IRC. If PSEC were to be declassified as a RIC per the IRC, all of its investment company net taxable income would be subject to taxation at regular corporate tax rates because it would not be allowed to take the "dividends paid deduction" at the corporate level.

PSEC intends to distribute (at a minimum) between 90% - 100% of its investment company net taxable income during a calendar tax year. As such, PSEC will be in compliance with the 90% distribution of a RIC's investment company net taxable income provision. Therefore, PSEC anticipates that it will not incur any federal or state income tax at the corporate level.

Side Note: It should be noted if PSEC intends to distribute less than 98% of its investment company taxable income or less than 98.2% of its net capital gains in a calendar tax year, the retained portion of its investment company net taxable income would be subject to a 4% non-deductible federal excise tax. At the end of the 2012 calendar tax year, PSEC accrued for and subsequently paid an excise tax of $4.5 million in relation to the undistributed investment company net taxable income retained at 12/31/2012. Through 6/30/2013, PSEC has accrued for an additional excise tax of $2 million as it once again expects to retain a portion of its investment company net taxable income through 12/31/2013. I have added this side note because an excise tax is a good indicator whether an entity has underpaid its investment company net taxable income in a given calendar tax year. For purposes of this article (an entity's dividend sustainability analysis), this is an important piece of information to consider.

Investment Company Net Taxable Income Overview:

- See Red References "A, B, C, D, E, F, G, H" in Table 1 Below Next to the June 30, 2013 Column

Before we begin PSEC's dividend sustainability analysis, let us first get accustomed to the information provided in Table 1 below. Table 1 shows PSEC's annual investment company net taxable income for fiscal years 2008 - 2013. All figures within Table 1 are for the "fiscal year" (annual) timeframe. All (ACTUAL) figures in regards to red references "A, B, C, H" are derived from PSEC's annual SEC submissions via its 10-K. Table 1 also shows a dividend sustainability calculation (TEST 1). TEST 1 will be discussed later on in the article. PSEC does not provide a table that shows any dividend sustainability analysis (red references "F, G, (F/E)"). Therefore, Table 1 is partially created by my own research. All figures are checked and tied back to various spreadsheets and data from PSEC's supported documentation where applicable.

Side Note: If one were to look at Table 1's red reference "(F/E)", some fiscal years show PSEC distributed less than the 90% annual distribution requirement per the IRC. For instance, fiscal years 2009 and 2012 show a total investment company net taxable income distribution of 84% and 85%, respectively. However, as mentioned in a side note earlier, PSEC's fiscal year-end is June 30th of a given year. However, for taxation purposes, PSEC's year-end is December 31st of a given year (based on a calendar year). Table 1 shows PSEC's fiscal years (as opposed to its tax calendar years) to highlight its investment company net taxable income when compared to its annual fiscal dividend distributions to spot patterns and trends when quarterly SEC filings are presented. Under any given calendar tax year since its IPO, PSEC has not failed the 90% distribution of its investment company net taxable income provision per the IRC. If Table 1 were based on figures representing a calendar tax year (versus a fiscal year), the results would dictate as such. Using Table 1 as a reference, PSEC's fiscal second half of 2009 underpayment is offset by its fiscal first half of 2010 overpayment. Also, PSEC's fiscal second half of 2011 overpayment is offset by its fiscal first half of 2012 underpayment. To reiterate, Table 1 shows PSEC's annual investment company net taxable income based on its fiscal year-end of June 30th of a given year versus the calendar tax year-end of December 31st of a given year for analysis purposes.

Table 1 - PSEC Annual Investment Company Net Taxable Income Analysis


(Click to enlarge)

Let us now take a look at Table 1's accounts (in corresponding order) in any given fiscal year and briefly describe what these accounts mean and where the information comes from.

Side Note: Readers of my past dividend sustainability articles in relation to FSC can skip the following section and go to the "TEST 1 - Annual Investment Company Net Taxable Income vs. Annual Distributions to Shareholders from NII Analysis:" header further down in the article.

A) Net Increase in Net Assets Resulting From Operations:

- See Red Reference "A" in Table 1 Above Next to the June 30, 2013 Column

This figure comes directly from PSEC's annual 10-K SEC submission via its income statement. This is a pretty straightforward figure to obtain. As such, further discussion of this figure will not occur in this particular article.

B) Book to Tax Differences (Reversals):

- See Red Reference "B" in Table 1 Above Next to the June 30, 2013 Column

In order for PSEC to come up with a proper investment company taxable income figure, there are specific "Generally Accepted Accounting Principles" ('GAAP') to IRC adjustments (reversals) that need to be performed each quarter. Income and expense recognition of certain accounting transactions differ between GAAP and the IRC (book vs. tax accounting treatments).

A majority of PSEC's book to tax differences (either temporary or permanent) consist of the following: 1) unrealized appreciation (depreciation) on investments; 2) income or loss recognition on exited investments; 3) deferred financing fees on loans; 4) organizational and deferred offering costs in relation to equity raises; and 5) timing recognition of interest income on certain loans.

There are several other book to tax adjustments that PSEC recognizes. However, for purposes of this article, further discussion of these additional adjustments is unwarranted.

C) Investment Company Taxable Income:

- See Red Reference "C" in Table 1 Above Next to the June 30, 2013 Column

After adding back (or subtracting out) PSEC's book to tax differences from its net increase in net assets resulting from operations figure, one can now calculate PSEC's investment company taxable income.

D) Net Capital Gains:

- See Red Reference "D" in Table 1 Above Next to the June 30, 2013 Column

Once PSEC's investment company taxable income is known, one adds any net capital gains to this figure. As mentioned in a side note earlier, PSEC had a capital loss carryforward as of 12/31/2012 to offset any net capital gains that might arise in the future. As such, this balance will continue to remain $0 for at least the next several quarters even if PSEC realizes a material amount of short-term net capital gains on its equity investments or warrants. PSEC's debt investments are usually exited at par under a "best-case scenario". In some instances, PSEC exits its debt investments at a realized loss (hence the capital loss carryforward as of 12/31/2012).

E) Investment Company Net Taxable Income:

- See Red Reference "E" in Table 1 Above Next to the June 30, 2013 Column

As mentioned earlier, this figure will currently be the same amount as PSEC's investment company taxable income since PSEC had a capital loss carryforward as of 12/31/2012. This figure is a key component when PSEC determines its current and future dividend per share amounts. As was discussed earlier, PSEC is required to distribute at least 90% of its investment company net taxable income in the current calendar tax year to continue to be classified as a RIC per the IRC (assuming the spillback provision is not used).

F) Distributions to Shareholders from NII:

- See Red Reference "F" in Table 1 Above Next to the June 30, 2013 Column

This figure represents the annual dividend accrued for and paid by PSEC in regards to its outstanding common shares (with the exception of December). December's monthly dividend is accrued for in the current year but subsequently paid in the following year (January). PSEC currently makes twelve separate monthly dividend distributions each year. Each annual distribution figure is reconciled and tied back to PSEC's supported documentation.

G) Underpayment (Overpayment) of Investment Company Net Taxable Income:

- See Red Reference "G" in Table 1 Above Next to the June 30, 2013 Column

This figure represents the annual underpayment (overpayment) of PSEC's investment company net taxable income when compared to its annual "distributions to outstanding common shareholders from NII" figure (see red reference "(E - F) = G" in Table 1 above). I also include what percentage of investment company net taxable income is paid out in a given fiscal year (payout ratio) for additional clarity and insight (see red reference "(F / E)" in Table 1 above).

H) Annual Dividend Distributions Accrual / Payout (Per Share):

- See Red Reference "H" in Table 1 Above Next to the June 30, 2013 Column

This figure represents the annual dividend per share accrued for and paid by PSEC in regards to its outstanding common shares (with the exception of December). As stated earlier, December's monthly dividend is accrued for in the current year but subsequently paid in the following year (January). Each annual dividend distributions per share figure is reconciled and tied back to PSEC's supported documentation.

Now that there is a basic understanding of how PSEC calculates its investment company net taxable income (via Table 1 above), let us perform the first part of PSEC's dividend sustainability analysis. This analysis will be a good indicator of PSEC's current dividend sustainability for the foreseeable future including whether an impending dividend raise or cut could eventually come to fruition. We will begin with TEST 1 followed by TEST 2.

TEST 1 - Annual Investment Company Net Taxable Income vs. Annual Distributions to Shareholders from NII Analysis:

- See Table 1 Above; Red References "E, F, G, (F / E)" Next to the June 30, 2013 Column

Using Table 1 above as a reference, I take PSEC's annual "investment company net taxable income / annual distribution requirement" figure (red reference "E" in Table 1) and subtract this amount by the annual "distributions to shareholders from NII" figure (red reference "F" in Table 1). If PSEC's red reference "E" is greater than its red reference "F", then PSEC technically has enough annual investment company net taxable income to pay out via its monthly dividend distributions. As such, any excess annual investment company net taxable income will be added to its "accumulative undistributed investment company net taxable income (deficit)" balance. This balance will be defined and analyzed within TEST 2 later on in the article. If PSEC's red reference "E" is less than its red reference "F", then PSEC has overpaid its annual dividend distributions. Therefore, PSEC must add a net deficit amount to its accumulative undistributed investment company net taxable income (deficit) balance to account for the overpayment in the year.

After performing TEST 1, I conclude PSEC has underpaid its annual investment company net taxable income for the fiscal years of 2009, 2012, and 2013. PSEC has overpaid its annual investment company net taxable income for the fiscal years of 2010 and 2011. PSEC paid 100% of its annual investment company net taxable income for the fiscal year of 2008. When comparing TEST 1's results to FSC (a similar BDC company), PSEC's distributions are much more favorable towards maintaining or fractionally increasing its current dividend.

Using Table 1 as a reference, PSEC's lowest payout ratio came in the fiscal year of 2012. In this fiscal year, PSEC had an underpayment of its annual investment company net taxable income of $27.5 million. This translates to a payout ratio of 84% of its annual investment company net taxable income. PSEC's highest payout ratio came in the fiscal year of 2010. During this fiscal year, PSEC had an overpayment of its investment company net taxable income of ($29.5) million. This translates to a payout ratio of 141% of its annual investment company net taxable income. However, since other fiscal years had annual underpayments, PSEC's undistributed investment company net taxable income (deficit) balance has never been materially underpaid or overpaid over the course of several years (as will be shown in TEST 2 below). PSEC had a combined dividend distributions overpayment of ($57.0) million for the fiscal years of 2009 and 2010 but also had a combined dividend distributions underpayment of $56.0 million for the fiscal years of 2012 and 2013. As such, the total underpayments and overpayments net themselves out over the course of several years.

Also, during the fiscal years when PSEC had material annual overpayments, management properly reduced its annual dividend per share accordingly. For the fiscal year of 2010, PSEC incurred material realized losses of ($51.5) million in relation to its sold/exited debt and equity investments. Per GAAP, these losses reduce PSEC's net increase in net assets resulting from operations (net income) figure. As such, PSEC's GAAP reported income was only $19.6 million for the fiscal year of 2010. However, for taxation purposes, these realized losses can only be offset against long-term capital gains which PSEC did not have. As such, PSEC's annual investment company net taxable income was a materially larger $71.5 million. However, PSEC's annual investment company net taxable income was still not growing at a comparable rate considering its market capital expansion during the fiscal year of 2010. Due to these circumstances, management felt it was prudent to decrease its annual dividend amount from $1.618 per share for the fiscal year of 2009 to $1.326 per share for the fiscal year of 2010. This calculates to a material 18% annual dividend per share reduction. The material reduction of its annual dividend per share figure helped PSEC mitigate continued future dividend overpayments.

Continuing into the fiscal year of 2011, PSEC incurred realized gains of $16.5 million in relation to its sold/exited debt and equity investments. Per GAAP, these gains increase PSEC's net increase in net assets resulting from operations (net income) figure. As such, PSEC's GAAP reported income increased from $10.6 million for the fiscal year of 2010 to $118.8 million for the fiscal year of 2011. However, for taxation purposes, these realized gains can be offset against PSEC's capital loss carryforward position accumulated from past years. As such, PSEC's annual investment company net taxable income was only $78.8 million (including all the other book to tax adjustments). This calculates to only a $7.3 million "year-over-year" increase regarding this specific account. Even though PSEC's net income figure drastically increased, its investment company net taxable income remained relatively flat. Due to these circumstances, management felt it was only prudent to continue to decrease its annual dividend amount from $1.326 per share for the fiscal year of 2010 to $1.211 per share for the fiscal year of 2011 (even though GAAP net income materially increased). This calculates to a further reduction of PSEC's annual dividend per share by 9% . Again, this shows management correctly considered its annual investment company net taxable income figure thus assuring future dividend overpayments would be minimized.

Due to PSEC's active management regarding the reduction of its annual dividend per share amounts for the fiscal years of 2010 and 2011, the dividend was able to increase in the fiscal years of 2012 and 2013 when annual investment company net taxable income materially increased. PSEC's annual investment company net taxable income increased from $78.8 million for the fiscal year of 2011 to $168.9 million and $300.0 million for the fiscal years of 2012 and 2013, respectively.

Therefore, TEST 1 shows PSEC (over several years) has distributed an annual dividend per share amount that is close to 100% of its investment company net taxable income. As such, the probability of a dividend cut being implemented has been reduced as evidenced from TEST 1's results. Due to the underpayment of its dividend for the fiscal years of 2012 and 2013, current trends indicate the probability of the dividend being maintained (or fractionally increased) has become more probable.

Now let us see how PSEC's annual underpayment (overpayment) of its investment company net taxable income affects its accumulative undistributed investment company net taxable income (deficit) balance since its IPO in 2004. We will look at this account from both a GAAP and IRC perspective. As will be discussed below, the name associated with the GAAP version of this account is PSEC's "undistributed net investment income (deficit)".

TEST 2 - Accumulative Undistributed Investment Company Net Taxable Income (Deficit) Analysis:

- See Table 2 Below; Red References "I, N" in Table 2 Below Next to the June 30, 2013 Column

Using Table 2 below as a reference, the annual figure in regards to the red references "I" and "L" are derived from PSEC's annual SEC submission via its 10-K. All remaining figures are checked and tied back to various spreadsheets and data from PSEC's supported documentation where applicable.

Table 2 - PSEC Accumulative Undistributed Investment Company Net Taxable Income (Deficit) Analysis


(Click to enlarge)

Using Table 2 as a reference, I first show PSEC's annual accumulative undistributed net investment income (deficit) figure (red reference "I" in Table 2) per GAAP. I then show PSEC's annual change to this balance (red reference "J" in Table 2). I then compare PSEC's annual change to its accumulative undistributed net investment income (deficit) figure per GAAP to the correlating IRC figure (red reference "G" in Table 2). The red reference "G" figure is the same amount as Table 1's underpayment (overpayment) of investment company net taxable income figure shown earlier.

I then compare PSEC's annual accumulative undistributed net investment income (deficit) figure per GAAP to its IRC annual accumulative undistributed investment company net taxable income (deficit) amount to obtain the "total - annual book vs. tax variance" figure (red reference "(J - G) = K" in Table 2). To properly reconcile the differing balances, I need to add back the following book to tax differences to obtain PSEC's "true tax adjustments" figure (red reference "L" in Table 2): 1) deferred financing fees on loans; 2) organizational and deferred offering costs in relation to equity raises; 3) timing recognition of interest income on certain loans; and 4) other book to tax differences. After adding these book to tax reversals together, PSEC's "total 'true' adjustments" figure (red reference "L = M" in Table 2) will reconcile to PSEC's total - annual book vs. tax variance figure (red reference "(J - G) = K" in Table 2) mentioned above.

Now that we have reconciled and accounted for the annual differences in PSEC's accumulative undistributed net investment income (deficit) figure per GAAP and its accumulative undistributed investment company net taxable income per the IRC, we can now analyze Table 2.

Going back to the fiscal year of 2008, PSEC had an accumulative undistributed net investment income balance of $1.5 million per GAAP. More importantly, for dividend sustainability purposes, PSEC had an accumulative undistributed investment company net taxable income balance of $3.5 million per the IRC. However, as PSEC incurred material realized losses in the fiscal year of 2010, both GAAP and IRC account balances became deficits. Using Table 2 as a reference, this deficit trend continued through the fiscal year of 2011. By the end of the fiscal year of 2011, PSEC had an accumulative undistributed net investment deficit balance of ($21.6) million per GAAP. More importantly, for dividend sustainability purposes, PSEC has an accumulative undistributed investment company net taxable deficit balance of ($47.1) million per the IRC.

However, for the fiscal years of 2012 and 2013, this accumulated deficit reversed course. By the end of the fiscal year of 2013, PSEC had an accumulative undistributed net investment income balance of $77.1 million per GAAP. More importantly, for dividend sustainability purposes, PSEC has an accumulative undistributed investment company net taxable income balance of $8.9 million per the IRC. For the fiscal years of 2012 and 2013, both GAAP and IRC account balances had material annual surpluses. As such, PSEC was able to slightly increase its annual dividend amount from $1.211 per share in the fiscal year of 2011 to $1.217 per share and $1.279 per share in the fiscal years of 2012 and 2013, respectively. This is a positive sign regarding PSEC's future dividend sustainability.

In the past, I have done this specific analysis for entities with similar IRC dividend distribution provisions (including several entities within the BDC sector). When compared to these other companies, PSEC's 6/30/2013 accumulative undistributed investment company net taxable income balance is either "in-line" with these other entities or modestly better.

Therefore, TEST 2 shows PSEC has maintained an adequate annual dividend per share rate and should continue to increase its accumulative undistributed investment company net taxable balance if it maintains or slightly increases its current dividend. This has partially already been established. PSEC's monthly dividend for June 2013 was $0.110150 per share. Per PSEC's latest dividend announcement, it declared a monthly dividend for March 2014 of $0.110375 per share. This calculates to a very slight increase in its monthly dividend per share amount. As such, I feel TEST 2's analysis helps add evidence to the conclusion stated in TEST 1's results earlier. TEST 1's conclusion was PSEC's dividend is relatively stable and continues to increase ever so slightly. The possibility of a dividend cut in the near future is relatively low.

Conclusions Drawn:

Two dividend sustainability tests have been performed on PSEC so far. These two tests focus on PSEC's investment company net taxable income component.

TEST 1 took PSEC's annual investment company net taxable income figure and compared it to its annual dividend distributions figure. TEST 1 showed PSEC (over several years) has distributed an annual dividend extremely close to 100% of its investment company net taxable income. As such (from a taxation standpoint), the probability of a dividend cut being declared is a fairly low probability as evidenced from TEST 1's results. Due to PSEC's investment company net taxable income underpayments for the fiscal years of 2012 and 2013, the current trends indicate the moderately high probability of a continued fractional dividend increase for at least the next several quarters.

TEST 2 took PSEC's accumulative undistributed net investment income (deficit) balance per GAAP and reconciled this balance to PSEC's accumulative undistributed investment company net taxable income (deficit) balance per the IRC. TEST 2 then analyzed both these cumulative running balances. TEST 2 showed PSEC has maintained an adequate annual dividend per share rate. TEST 2 also showed PSEC should continue to increase its accumulative undistributed investment company net taxable income balance if it maintains or fractionally increases its monthly dividend per share rate. As such, I feel TEST 2 helps add evidence to the conclusion stated in TEST 1's results.

Even though the current dividend seems sustainable for the foreseeable future when analyzing PSEC's investment company net taxable income figure (based on IRC methodologies), further evidence and analysis should be performed to solidify PART 1's conclusion. PSEC's investment company net taxable income figure is just one component management considers when declaring a proper dividend per share rate. As such, PART 2 of this article will discuss some additional factors PSEC considers when deciding its monthly dividend per share rate. For PART 2 of PSEC's dividend sustainability analysis, all amounts and figures will be based on GAAP methodologies.

Source: Prospect Capital Corp.'s Dividend Sustainability Analysis (Post Fiscal Q4 2013 Earnings) - Part 1