Prospect Capital: Time Is Money

| About: Prospect Capital (PSEC)

Summary

I consistently hear from readers that they are "losing money" in PSEC.

I run some key hypothetical scenarios to put this claim to the test.

Perhaps you need to reconsider how you establish your position.

Why the distribution is secure.

I'm going to cut right to the chase here. I'm amazed at the number of people who continue to tell me that they are "losing money" in Prospect Capital (NASDAQ:PSEC). I'm at the point of calling BS. Look, the name has been pressured but remains one of my core income-generating holdings. It has gotten crushed following its dividend cuts and got absolutely hammered down to the $5 level, at which point I told you to back up the truck and buy buy buy. The stock is up 40% since that mark. I digress. Still, many have been abandoning the ship. Remember, I didn't start getting behind the name with authority until the stock was in the $8.00 range and below, though I first recommended initiating a position with a plan to pyramid into the name, if able, when it traded around $10.00. But it got me to thinking. But over and over, I hear the story of how people are losing their shirts in the name.

Really? Did you only buy once and sit on the investment? Unlikely, and incorrect investing style if so. Every now and again when I hear such malarkey I feel the need to do an exercise where I look at hypothetical performance. I have done this numerous times and looked at other dividend payers in the past. Prospect has been paying a strong distribution since its inception. The historical dividends since the turn of the century along with some hypothetical, one-time buyers are shown (table 1). I think a near 12-year history should be a sufficient gauge to judge the performance of the name.

Table 1. Prospect Capital's Distribution History Since December 2004 And Four Hypothetical Investments Since The End of 2004.

Ex dividend Date

Payment Date

Cash Amount

Total Paid

Buyer/Date

Price Paid

12/8/2004

12/30/2004

$ 0.100000

$ 0.100000

Buyer 1: 11/18/04

$14.31

3/9/2005

3/31/2005

$ 0.125000

$ 0.225000

6/8/2005

6/30/2005

$ 0.150000

$ 0.375000

9/20/2005

9/29/2005

$ 0.200000

$ 0.575000

12/20/2005

12/29/2005

$ 0.280000

$ 0.855000

3/22/2006

3/31/2006

$ 0.300000

$ 1.155000

6/21/2006

6/30/2006

$ 0.340000

$ 1.495000

9/20/2006

9/29/2006

$ 0.380000

$ 1.875000

12/27/2006

1/5/2007

$ 0.385000

$ 2.260000

3/21/2007

3/30/2007

$ 0.387500

$ 2.647500

6/20/2007

6/29/2007

$ 0.390000

$ 3.037500

Buyer 2: 6/9/07

$18.20

9/17/2007

9/28/2007

$ 0.392500

$ 3.430000

12/26/2007

1/7/2008

$ 0.395000

$ 3.825000

3/27/2008

4/16/2008

$ 0.400000

$ 4.225000

6/26/2008

7/16/2008

$ 0.401250

$ 4.626250

9/26/2008

10/16/2008

$ 0.402500

$ 5.028750

12/29/2008

1/19/2009

$ 0.403750

$ 5.432500

3/27/2009

4/20/2009

$ 0.405000

$ 5.837500

7/6/2009

7/20/2009

$ 0.406250

$ 6.243750

10/6/2009

10/19/2009

$ 0.407500

$ 6.651250

12/29/2009

1/25/2010

$ 0.408750

$ 7.060000

3/30/2010

4/23/2010

$ 0.410000

$ 7.470000

6/28/2010

7/30/2010

$ 0.100000

$ 7.570000

7/28/2010

8/31/2010

$ 0.100250

$ 7.670250

8/27/2010

9/30/2010

$ 0.100500

$ 7.770750

9/28/2010

10/29/2010

$ 0.100625

$ 7.871375

10/27/2010

11/30/2010

$ 0.100750

$ 7.972125

11/26/2010

12/31/2010

$ 0.100875

$ 8.073000

12/29/2010

1/31/2011

$ 0.101000

$ 8.174000

1/27/2011

2/28/2011

$ 0.101125

$ 8.275125

2/24/2011

3/31/2011

$ 0.101150

$ 8.376275

3/29/2011

4/29/2011

$ 0.101175

$ 8.477450

4/27/2011

5/31/2011

$ 0.101200

$ 8.578650

5/26/2011

6/24/2011

$ 0.101225

$ 8.679875

6/28/2011

7/22/2011

$ 0.101250

$ 8.781125

7/27/2011

8/26/2011

$ 0.101275

$ 8.882400

8/29/2011

9/23/2011

$ 0.101300

$ 8.983700

9/28/2011

10/25/2011

$ 0.101325

$ 9.085025

10/27/2011

11/22/2011

$ 0.101350

$ 9.186375

11/28/2011

12/22/2011

$ 0.101375

$ 9.287750

12/28/2011

1/25/2012

$ 0.101400

$ 9.389150

1/27/2012

2/17/2012

$ 0.101425

$ 9.490575

2/27/2012

3/23/2012

$ 0.101450

$ 9.592025

3/28/2012

4/20/2012

$ 0.101475

$ 9.693500

4/26/2012

5/24/2012

$ 0.101500

$ 9.795000

5/29/2012

6/22/2012

$ 0.101525

$ 9.896525

6/27/2012

7/24/2012

$ 0.101550

$ 9.998075

7/27/2012

8/24/2012

$ 0.101575

$ 10.099650

8/29/2012

9/21/2012

$ 0.101600

$ 10.201250

9/26/2012

10/24/2012

$ 0.101625

$ 10.302875

10/29/2012

11/22/2012

$ 0.101650

$ 10.404525

11/28/2012

12/20/2012

$ 0.101675

$ 10.506200

12/27/2012

1/23/2013

$ 0.110000

$ 10.616200

1/29/2013

2/20/2013

$ 0.110025

$ 10.726225

2/26/2013

3/21/2013

$ 0.110050

$ 10.836275

3/26/2013

4/18/2013

$ 0.110075

$ 10.946350

4/26/2013

5/23/2013

$ 0.110100

$ 11.056450

5/29/2013

6/20/2013

$ 0.110125

$ 11.166575

6/26/2013

7/18/2013

$ 0.110150

$ 11.276725

7/29/2013

8/22/2013

$ 0.110175

$ 11.386900

8/28/2013

9/19/2013

$ 0.110200

$ 11.497100

9/26/2013

10/24/2013

$ 0.110225

$ 11.607325

10/29/2013

11/21/2013

$ 0.110250

$ 11.717575

11/26/2013

12/19/2013

$ 0.110275

$ 11.827850

12/27/2013

1/23/2014

$ 0.110300

$ 11.938150

1/29/2014

2/20/2014

$ 0.110325

$ 12.048475

Buyer 3: 1/27/14

$11.10

2/26/2014

3/20/2014

$ 0.110350

$ 12.158825

3/27/2014

4/17/2014

$ 0.110375

$ 12.269200

4/28/2014

5/22/2014

$ 0.110400

$ 12.379600

5/28/2014

6/19/2014

$ 0.110425

$ 12.490025

6/26/2014

7/24/2014

$ 0.110450

$ 12.600475

7/29/2014

8/21/2014

$ 0.110475

$ 12.710950

8/27/2014

9/18/2014

$ 0.110500

$ 12.821450

9/26/2014

10/22/2014

$ 0.110525

$ 12.931975

10/29/2014

11/20/2014

$ 0.110550

$ 13.042525

11/25/2014

12/18/2014

$ 0.110575

$ 13.153100

12/29/2014

1/22/2015

$ 0.110600

$ 13.263700

1/28/2015

2/19/2015

$ 0.110625

$ 13.374325

2/25/2015

3/19/2015

$ 0.083330

$ 13.457655

3/27/2015

4/23/2015

$ 0.083330

$ 13.540985

4/28/2015

5/21/2015

$ 0.083330

$ 13.624315

5/27/2015

6/18/2015

$ 0.083330

$ 13.707645

Buyer 4: 5/12/15

$7.99

6/26/2015

7/23/2015

$ 0.083330

$ 13.790975

7/29/2015

8/20/2015

$ 0.083330

$ 13.874305

8/27/2015

9/17/2015

$ 0.083330

$ 13.957635

9/28/2015

10/22/2015

$ 0.083330

$ 14.040965

10/28/2015

11/19/2015

$ 0.083330

$ 14.124295

11/25/2015

12/24/2015

$ 0.083330

$ 14.207625

12/29/2015

1/21/2016

$ 0.083330

$ 14.290955

1/27/2016

2/18/2016

$ 0.083330

$ 14.374285

2/25/2016

3/24/2016

$ 0.083330

$ 14.457615

3/29/2016

4/21/2016

$ 0.083330

$ 14.540945

4/27/2016

5/19/2016

$ 0.083330

$14.624275

Click to enlarge

*Distribution not yet paid

Source: Nasdaq and Annaly Capital's Historical Dividend Payments

Clearly, Prospect has a strong history of paying shareholders. However, the share price has suffered, as you can see looking at the original buyer compared to the fourth buyer. As I have said in so many other articles, I'm not in this name for capital gains (although I contend those buying at current levels are likely to see them). I'm in the name for the payouts. The dividend now being at $0.08333 is obviously at the lowest it has been since 2005. However, with the cyclical nature of the business, the dividend can fluctuate. It can go up or down. I see it being maintained the rest of the year. But to the crux of the article, I'd like to illustrate the long-term impact of Prospect's distribution on buyers at different buy points in the company's history.

Let's look first at buyer 1, a long-term holder that bought at $14.31 in November 2004. Let's assume our hypothetical investor purchased shares once and did not add on dips, sell a little when the stock ran up, or reinvest any of the payouts. As of the current share price of $7.50, this person would be down $6.81 or 47%. Ouch. There is no doubt that is a terrible unrealized loss of capital over an 11-year-plus period. However, this is where the power of the distribution comes into play. Look to the math. Quarter-after-quarter (or now month-after-month) distributions have been steadily paid to this investor. In fact, after this month's payment, this investor has been paid a total $14.63. Thus, the investment is down $6.81 in unrealized capital losses and $14.63 in dividends for a total return of $7.82. That is a total of 55%.

Now don't think this is a disappointment over 12 years. I mean it's a nice positive return, but there could be so much more made in other moderate growth names. Of course, as you can see, as of February of this year, this investor has recouped his entire investment through distributions. Every single penny. Thus, for the rest of this investor's time in the stock, it's "free" money. Let us not forget that with the cyclical nature of rates, etc., the investor is likely to be in long enough to see a future rebound in share price and distribution increases. This investor has obviously lost nothing.

If you are reading my work now, you probably aren't represented by buyer 1. How about Buyer 2 who has been selected as a "sucker?" Someone who bought at the height of Prospect's trading in 2007. Let us assume buyer 2 purchased shares at $18.20 in June 2007. Once again, let's assume buyer 2 purchased shares just once and held. Based on the price of $7.50, this person would be at a whopping $10.70 or 59% down. That hurts, but let's remember the distribution, which paid to date for this investor totaled $11.98. So, the investment is now down $10.70 in unrealized capital losses, but up $11.98 in dividends for a total return of $1.28. That is a total of 7%. Admittedly this is a pathetic return, but it is positive nonetheless. Moral of this story? Time is your friend.

Hopefully you are nothing like buyer 2. This takes me to buyer 3, who may represent some of those who are actually truly down. But this is because you bought all at once and that was it. I hope you are not like "buyer 3." Buyer 3 purchased shares at $11.10 in January 2014 and held. As of the current share price of $7.50, this person would be down $3.60 or 32% on paper. Ouch. How about the dividends? There just has not been enough time. The dividends paid to date for this investor total $2.69. So the investment is now down $3.60 in unrealized capital losses, but up $2.68 in dividends for a total loss of $0.92. That is a total of 8%. That is a loss, and so some of you may truly be in this boat. But why would you only buy all at once? I always recommend buying in progressively higher blocks on the way down to complete a position.

Finally, I want to address a fourth buyer who likely represents most closely those reading. Assume buyer 4 purchased shares at $7.99 a year ago on May 2015. Yes, once again we shall assume buyer 4 hasn't added or reinvested anything. As of the current share price of $7.50, this investor would be down $0.44 or 5.5% on paper. How about the distributions? The dividends paid to date for this investor total $1.00. So, the investment is now down $0.44 in unrealized capital losses, but up $1.00 in dividends for a total gain of $0.56. That is a gain of 7%. That is respectable in a year.

As you can see, there is power in the distributions and in time. What this analysis does not address, which would have increased the returns for the first few buyers, is buying on the way down and trading around the core position. You should never buy all at once. The moral of the story is that time is your friend and buy in a wise fashion. Secondly, this piece rests on a maintained distribution. I see the dividend being maintained. Why?

Last quarter was so-so. It was not strong in any capacity, nor was it overly weak. One key piece of news is the company maintained its distribution payout the next three months. Net investment income came in at $87.6 million or $0.25 per weighted average share for the quarter. This net investment income was a miss against estimates and rose $0.2 million year over year. Keep in mind, the company paid $0.25 per share in distributions. When looking at the non-GAAP distributable income figure, we see this came in at $86.6 million $0.24 per share. Thus, the distribution was nearly covered, but not entirely. However, the distribution is safe. Why?

The term "spillback" comes into play. What do I mean by this? I'm talking about income in excess of distributions. For fiscal 2015 year, which ended June 30, 2015, the company generated $1.31 in distributable income, exceeding the $1.19 paid out. In fiscal Q1, there was another $0.02 in "spillback." In fiscal Q2, there was $0.03. And although in the most recent quarter, we technically did not cover the distribution by a penny, we have plenty in the contingency "spillback" fund to cover us. The distribution is secure.

In summation, I'm not really buying the argument that anyone is losing money here. If you haven't been in the name at least a year, then you still have a trade on your hands, not an investment. Time is your friend. Time is money.

As always I welcome your comments.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles, which are time sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I am/we are long PSEC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.