Wednesday, August 27, 2014

Defensive on Prospect Capital (PSEC)

I'm going over the recent earnings conference call and I'm not liking what I am seeing. Once again they have not covered their dividend with Net Interest Income (NII). For a business development company, NII is the amount of income they make off their loans. Consider it their revenue and sales that you would judge a corporation by. They haven't made enough for several quarters now.

How they have gotten by is through origination fees, the fees charged for issuing debt. They have been churning out a good deal of debt over the past year but how long can they keep it up?

In the dividend growth investing community speculation on price movement isn't often done. However I have said in the past that its critical to know what you are holding in a portfolio. PSEC is not a dividend growth stock. They do not raise dividends each year. They are not growing the company on a per share basis. They are all about high yield right now, not high yield on cost years from now. That's fine because that is what I bought them for. My two business development company positions, 1 is high yield and 1 has growth so I get the best of both. The market has priced PSEC at a 12.5% yield for a reason. Likewise the market has priced Main Street Capital (MAIN) at a 6% yield for a reason too. They grow the company on a per share basis and give dividend raises.

I prefer strong companies whose biggest problem is they are making so much money they have to give a special dividend like TCP Capital does (TCPC). PSEC's problem on the other hand is taking on more leverage, issuing riskier debt to maintain their yields, or cutting the dividend.

If its one thing I have learned from high yield investments its to not get greedy. Just look at GNI, BPT, WHX. You do not play musical chairs until the very end trying to get one more dividend or distribution.

I have a stop loss order in for PSEC @ $10.44.
EDIT: Out @ $10.44 same day.

Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial adviser, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.

4 comments:

  1. I'm thinking about a similar move for my PSEC position as well. It will be a pretty hefty short-term hit to the dividend income, but long-term should provide stability and growth by moving into other investments.

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    1. Wow looks like I am out and we dropped a good deal. I'll be back in if we get into the $8 range like in 2011.

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    1. Heya DSF. Yeah I am seeing more and more people talking bearish and negative about PSEC. If it drops down to the $8s I'll probably be back in.

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