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Published: January 21, 2010
A 13% yield -- these days or any other --
is impressive for any company. Fewer than 50 out of the
thousands listed on U.S. exchanges can match that payout.
Such a robust yield is a show-stopper on its own, but this
company's dividend growth is also impressive. Not only has the
dividend increased every quarter since the company's 2004
initial public offering, but the pace of those increases amounts
to a +33% annual growth rate.
In dollars-in-your-pocket terms, that means the dividend
doubles every two-and-a half years.
Prospect Capital Corp. (Nasdaq: PSEC) is a $700 million
New York-based private-equity firm that has non-controlling debt
and equity investments in about 60 private companies.
The company is registered as a "business-development" company,
which essentially means that it's a venture-capital firm that
ordinary investors can participate in. This status gives
Prospect certain perks and limitations: Business-development
companies must pay at least 90% of their taxable earnings to
shareholders. They're also legally required to keep their debt
levels below equity levels.
Prospect was founded in 1988. It invests in small firms in the
United States and Canada across all industry sectors. Its latest
filing showed oil-and-gas production comprised 17.4% of its
interests, its largest concentration, followed by manufacturing
(11.9%), health care (9.6%) and mining (8.7%).
Earnings have been inconsistent during the past two years,
and Prospect posted 2Q and 3Q losses in 2009. Several factors,
however, suggest that the long-term future will be brighter than
the immediate past.
First, Standard & Poor's recently gave Prospect an
investment-grade rating, which improves its access to capital
and lowers the cost.
Second, Prospect expects its recent acquisition of Patriot
Capital to pay off. Prospect has said the acquisition will add
$0.09 of net investment income -- or more -- per quarter per
share, which would have increased the company's earnings per
share during the past twelve months by more than +30%.
The Patriot Capital acquisition, completed in December 2009,
added 30 companies to Prospect's investment portfolio for a
price of $197 million. Patriot's total price, as estimated by
Prospect, was a good deal -- just 63% of asset cost and 75% of
asset book value. The deal grew Prospect's assets by +35%.
Even with this acquisition, Prospect's debt-to-equity ratio will
remain low, allowing it to finance more deals going forward.
While continued weaknesses in the economy threaten some of
Prospect Capital's investments in the short term, its
diversified portfolio, strong balance sheet and growth prospects
make the company a great play for risk-tolerant investors
looking for big yields.
-- Anthony Haddad
Staff Writer
StreetAuthority
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