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December 24, 2009 – Comments (12) | RELATED TICKERS: PSEC

I sold out my Prospect Capital (PSEC) position today.  It's a business development company with a very high yield, but had been regularly issuing stock earlier this year.  The high yield was nice, but for a stretch we were getting quarterly share offerings to go with the dividends.

I had owned the stock for about two years and between the dividend, a little trading around the position and an arb swap on the recent Patriot acquisition, I made a few bucks on it.  Not one of my better investments, but far from the worst.

Between a recent history of dilution and the stock price up around book value, the recent runup looked like a good opportunity to cash out and look for greener pastures.  If the stock should fall back to about $10 or below, I'd consider getting back in.

Greener pastures can be taken literally since part of the sale proceeds went to open a position in Calavo Growers.

Off to investigate cookie smells coming from the kitchen, then to wrap the wife's blue boxed gift.

Merry Christmas all!

 

12 Comments – Post Your Own

#1) On December 24, 2009 at 9:09 PM, awallejr (83.97) wrote:

I bought it under $10 and I still like it.  I don't mind stock offerings if the proceeds are used for accretive purposes.  I think the stock has more room to run. We shall see.

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#2) On December 24, 2009 at 9:20 PM, truthisntstupid (87.24) wrote:

Wow, RD

It just raised its dividend, it has no debt and those insiders are buying and holding.

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#3) On December 25, 2009 at 12:14 AM, awallejr (83.97) wrote:

Personally I think it will see $15 before it sees $10, but I can never critisize a person for selling something for a profit.

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#4) On December 26, 2009 at 2:34 PM, ikkyu2 (99.32) wrote:

I got rid of mine about a dollar ago.  I was happy to collect a few dividends but I didn't like the way the price was behaving, and I agree that the constant dilution was very annoying.

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#5) On December 26, 2009 at 4:42 PM, rd80 (98.45) wrote:

Thanks for the comments.

I agree that stock offerings to do something that's accretive to earnings are positive, but except for the Patriot buy, I'm not sure that description fits PSEC.  When I bought it two years ago, book value per share was around $15, as of 30 Sep it's about 11.  The Patriot deal will probably shift that number a bit.

I like no debt, but in PSEC's case, it sold stock with a very high dividend payout to retire that debt.  And PSEC is no longer debt free, it drew $60 million on a credit facility to close the Patriot acquisition.

In any event, good luck to those still holding it.

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#6) On December 30, 2009 at 11:45 AM, JustinJamm (< 20) wrote:

Prospect's book value is low because much of its portfolio consists of debt lending to companies that ratings agencies won't touch (because of size or status).  This gives PSEC a highout payout while being able to fund these loans relatively cheaply, but makes it look as if their asset value is crummy.  They were debt-free for a long time, actually, and the share issuances have been to purchase "cheap assets" that offer very high yields.  Now's the time for that, even though PSEC's own shares are also issuing at a discount.

"But wait," you say.  "Doesn't this raise the likelihood of defaults?"  Yes, to some extent.  But PSEC is very selective and often works alongside companies to make sure they retain financial solvency.  It's very impressive.

They also DO NOT use share capital to support the dividend, except for the rough period between their share issuance to assist in the Patriot acquisition, during which they suddenly had waaay more shares outbut hadn't actually acquired Patriot yet.  The dividend is supported entirely by cash flow.

The Patriot acquisition, while diluting the shares, still increased the EPS by about somewhere around 10 cents.  This makes it so they can resist a slough of defaults and still maintain their ever-increasing dividend.  I further expect their newfound debt to evaporate, and wouldn't be surprised to find them making another acquisition sometime this coming year.

Many "capital market" businesses are on the rocks (much like Patriot was -- just check the EPS on a number of capital market companies and you'll see what I mean), but PSEC, while struggling in some ways, is not on the rocks.  Their EPS was indeed weakening as companies in their portfolio took hits from the recession, but this phenomenon hit most capital market companies FAR harder than it hit PSEC.  The result of this is that PSEC is STILL cheap because its sector is dragging it down by association.

In summary, PSEC is a fantastic buy-and-hold for income purposes, and we can expect its NAV to increase as the economy improves even if they do nothing but sit there.  Their portfolio assets will likely increase in value simply because of people's economic fears easing over time.

I challenge ANY FOOL here to find a more powerful dividend play than this.  My own high-dividend portfolio includes PSEC (the kingof the portfolio, in my opinion), aided by its buddies FTR, MBJ, JNK, and HLNQ (try that last one on for size!).  I doubt there are better dividend plays in existence than PSEC, and I've done the research to say that with confidence.

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#7) On January 01, 2010 at 3:37 AM, ikkyu2 (99.32) wrote:

While Prospect trades as a dividend-paying equity security, it is not paying a "dividend" in the sense that it is paying out earnings from its core business to shareholders.  Instead, the dividend is coming from return on a lot of different kinds of financing activities.  PSEC is probably better described as an actively managed mezzanine debt fund or bond fund.  Bond funds don't pay dividends; they pay yields.

One of the things that I really liked about it when I first looked into PSEC in 2005 was the fact that most of its properties were small cap closely held energy and energy services companies.  You couldn't get exposure to that little subsector anywhere else so it was neat on that basis as well.  With the subsequent acquisitions, and especially with picking up PCAP, that has been lost; PSEC is a mishmosh of a lot of different sectors.

A "dividend play" as I use the phrase is a single company that pays a dividend.  Now's the part where I wag my finger and you laugh: you do not get a 15+% yield without commensurate risks, especially in this kind of rate environment.  Back in 2005 there certainly were investments that were much better than PSEC in terms of their aggregate yield; two that came to mind (because they were some of my first CAPS picks) are New Century and Novastar.

So, right, no better dividend plays in existence.  I like to keep my capital in existence, thank you very much. 

By the way, this post comes up prominently on the Google Finance page for PSEC, which I thought was neat. 

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#8) On January 08, 2010 at 10:47 AM, rd80 (98.45) wrote:

Well, this didn't turn out to be the best timed stock move I've ever made.

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#9) On January 08, 2010 at 3:11 PM, ikkyu2 (99.32) wrote:

You don't have to catch all of a move!  It wasn't a bad trade.  Only thing to question now is whether to get back in at this price; I personally don't think so.

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#10) On January 08, 2010 at 9:42 PM, rd80 (98.45) wrote:

Looks like Prospect is getting ready to issue more shares

Pretty much completed my swap over the last few days.  Added to the Calavo position when it fell on an earnings miss, then snagged a few shares of Hatteras Financial today (out of the high yield frying pan, into the fire). 

Still holding the CAPS green thumb on PSEC in hopes the pick will go positive for me, but not interested in buying back in at this price. 

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#11) On January 12, 2010 at 3:22 AM, CoyoteMoney (< 20) wrote:

Bought in last month at 11 and it closed at 12.75 on Monday.

I was going to pick up more to round out my position but I'm wondering if the stock has gotten too far ahead?  Not a big fan of volatility here.

I'd like to wait for a  market correction so I can pick up more shares on the cheap but I don't have enough insight into how this stock behaves.

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#12) On January 18, 2010 at 12:24 PM, JustinJamm (< 20) wrote:

I will update now that since the market's confidence in PSEC has gone up SO much, driving the price up, it is no longer *quite* as strong of a dividend play as, perhaps, something like WHX or AGNC -- although both of those offer flexible dividends, whereas PSEC's is consistent and stable.

 

Sorry you sold it back then, rd80.  But I'm glad you called so much Foolish attention to it here. =)

 

ikkyu2, your insights are helpful, and I appreciate why you liked PSEC as an energy-sector-specific closed-end-inv-fund play. However, it's interesting that the energy sector crashed so badly recently . . . not long after PSEC made the move to de-center from the energy sector!  Prospect believed that the sector-focus made the company's portfolio unstable and overly non-diversified.  Had they remained focused, I suspect that the market crash would've swept PSEC away with the rest of the capital market companies.

 

(There are still some energy-sector-specific funds out there, so that base is still covered, for those who are interested. )

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