Prospect Capital (NASDAQ:PSEC) sure had a memorable conference call, the transcript for which can be found here. As I was listening to it live, it seems as if investor concerns surrounding Prospect's large dividend, good for a yield just south of 13% at current prices, has bled over to the analyst community.
To put it mildly, these analysts were VERY interested in what Prospect had to say in regards to its dividend, with one analyst at MLV mentioning that the company has not covered the dividend for any quarter in fiscal 2014. The same analysts estimated that Prospect would have needed to boost its overall yield on net assets by 100 basis points to achieve a full coverage. Furthermore, it was noted by an analyst at KMW that Prospect did not make a dividend announcement simultaneously with its earnings release, a departure from its normal practice. By my count, at least 9 or 10 dividend related questions were asked in total, by far the dominant topic in the Q&A.
To be fair, Prospect's answers could not have been more spot-on and clear. The company noted that it was indeed dipping into prior-year excess NII to the fund the 2014 dividend. Do note that the company has declared dividends through the end of the year. In addition, Prospect mentioned that it has been impacted by the "lumpiness" in its deal flow. As I noted in a recent article, originations saw a ghastly 77% Q/Q decline on a net basis. As for plans to increase NII, the company noted that it is aiming to increase its leverage ratio up to 0.75x, compared to the 1.00x cap on BDCs. Furthermore, the company is looking to shift into higher-yielding, income-producing assets in the double-digit range, and away from lower-return areas such as senior loans, which yield only 6% to 7%.
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Disclosure: The author is long PSEC.
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