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Summary

  • Prospect Capital sees its NII come in at $0.31 per share, resulting in dividend coverage ratio of 0.94x.
  • NAV also sees a slight tumble to $10.68 per share.
  • However, Prospect Capital’s originations in the quarter were back-ended, with the resulting income likely to come next quarter.

Prospect Capital (NASDAQ:PSEC) has been a relatively stable stock since I purchased shares in late 2013. However, the share price has come under short-term pressure due to ETFs selling shares in anticipation of a reconstitution of the Russell and S&P indexes. Regardless, thanks to its large monthly dividends, Prospect Capital has still provided an adequate return of around 1% per month.

Q1 2014 (Fiscal Q3) Overview

On May 6, Prospect Capital reported its Q1 2014 (fiscal Q3) results. For the quarter, the company posted net investment income, or NII, of $98.5 million, or $0.31 per share. This compares to NII of $59.6 million, or $0.26 per share, last year. Do note that comparisons to last year are impacted by a 34% increase in Prospect Capital's share count since June 30, 2013.

Prospect Capital saw a 43% increase to its total investment income to around $156.4 million, compared to $109.6 million last year. However, this was more than outpaced by a 51% increase in total operating expenses to $91.8 million, compared to $60.6 million last year. The majority of this increase was due to higher interest expenses, up 52% to $31.7 million, and higher advisory fees, up 57% to $53.3 million.

Much like last quarter, a weak spot for Prospect Capital was its net asset value, or NAV. As of quarter end, Prospect Capital's NAV was around $10.68 per share, down 5 cents, or 0.5%, from $10.73 reported last quarter, but up 3 cents from last year's $10.71. At current prices, Prospect Capital trades right around par to its NAV.

Prospect Capital typically aims to payout nearly all of its net interest income via dividends. Oftentimes, a portion of the dividend may be a form of a return of capital from gains from sales of investments and or undistributed income from prior quarters. These typically have a negative impact on NAV.

However, it appears as if the company mostly covered its dividend. Based on NII of $0.31 per share and dividends paid of $0.33, Prospect Capital's dividend coverage ratio for Q1 (fiscal Q3) was very slightly below 0.94x, down from 0.99x last quarter.

Monthly dividends declared through December, 2014

Alongside its earnings, Prospect Capital announced monthly dividends for the months of October, November, and December 2014. This continues a trend for the company of declaring dividends well into the future, locking in income for its investors.

Do note that these dividends are all very small fractional monthly increases from prior levels. At current prices, Prospect Capital's forward yield is north of 12%.

Below is a summary of the declared dividends:

  • 11.0550 cents per share for October 2014 (record date of October 31, 2014 and payment date of November 20, 2014);

  • 11.0575 cents per share for November 2014 (record date of November 28, 2014 and payment date of December 18, 2014); and

  • 11.0600 cents per share for December 2014 (record date of December 31, 2014 and payment date of January 22, 2015).

  • These distributions mark Prospect's 75th, 76th, and 77th consecutive cash distributions to shareholders.

Loan Originations were strong towards the end of the quarter

During the quarter, Prospect Capital completed 18 new and follow-on investments for $1.34 billion. However, the company also received repayments, amortization, and other payments for proceeds of $198 million, which resulted in net total investments of about $1.15 billion.

This would mark a tripling from the $352.4 million in net originations last quarter. Do note that this figure does not include the $199 million acquisition of Nicholas Financial, Inc. (NASDAQ:NICK).

Loan originations are a key metric for Prospect Capital. As I have noted in a prior article, Prospect Capital's loan originations in the quarter were quite strong, record strong. However, the timing of several loans may have adverse impact on NII, with two loans towards the final days of Q1 totaling over $550 million.

That being said, Prospect Capital still has tons of room left over for new loans and investments, with a modest 48% debt-to-equity ratio. The company has noted that it aims to increase its leverage to around the 0.50x to 0.75x range. Do note that the company has roughly $900 million in new investment capacity, up 12.5% from $800 million last quarter.

Conclusion

Overall, Prospect Capital reported a decent quarter. NII per share did come in a tad light and below what I was expecting. However, the timing of some of the originations likely had a role to play.

NAV came in line with analyst expectations at $10.68, down 5 cents from last quarter. A drop is never welcome. However, it was hardly surprising with the company dipping into its reserves to pay for a portion of the dividend.

The best news from the report is that Prospect Capital has now declared dividends through the end of the year, locking in income for shareholders. At a 12% yield and trading very near NAV, the stock offers an attractive value proposition.

Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.

Source: Prospect Capital: A 12% Yield, Now 'Locked In' For The Year