Your Chance to Buy Prospect Capital Corporation on Fire-Sale Is Over, But It’s Still a Good Choice

Prospect surprisingly won its appeal to the SEC, and shares have rallied. However, they are still at a discount...

Jun 11, 2014 at 4:54PM

In Prospect Capital Corporation's (NASDAQ:PSEC) May 6th earnings release, the company disclosed its ongoing discussions with the SEC about the possible need to consolidate certain of its holding companies. The mention of the SEC is rarely welcome news for shareholders.

This prompted lots of speculation the company's past earnings were incorrect or inflated, and even sparked some class action lawsuits alleging the company mislead its investors by miscategorizing some of its holdings.

Well, after the market closed on Tuesday, June 10, Prospect announced they had won their appeal with the SEC and that no consolidation of assets would be necessary, nor would the company have to restate its historical financial results. This is a huge relief for Prospect, which can stop worrying about lawsuits and other legal issues and go back to doing what it does best.

Much ado about nothing
As soon as the discussions with the SEC were announced, Prospect's shares immediately plunged by 5%, and dropped further as soon as the pending class action lawsuits were announced.

Investors and lawyers were still in a panic about the effect of the possibility of restating old financial results, even after the company declared very clearly that the outcome of the SEC discussions, whatever it may be, would have no impact on Prospect's ability to pay its dividends.

Even so, a handful of law firms pounced on Prospect, stating the company intentionally mislead investors and inflated revenue and earnings figures. One law firm even went so far as to state that Prospect's financial statements were completely false, and that the company's internal and financial controls are simply inadequate.

The company cooperated fully from the SEC from the beginning and even emphasized what little effect it would have, regardless of the outcome. Still, it produced a big discount in Prospect's shares, which plunged from the $11 range to just over $9 after the lawsuits were announced.

The fire sale is over, but a discount remains – for now
Buying Prospect right after the lawsuits were announced would have produced a dividend yield of over 14.5%, plus the potential for upside once everything was sorted out.

Even though you can't get quite this sweet of a deal anymore, there is still a pretty nice bargain to be had here, thanks to the company's recently increased credit commitments.

In the midst of the SEC and legal drama, Prospect announced a couple of increases to its revolving credit facility commitments, which spooked investors. The company has a target maximum of $1 billion in revolving credit commitments, and the recent increases brought Prospect $65 million closer to that amount, with a current $857.5 million in commitments.

Still, although higher borrowing might be a little scary, it's not too much of a cause for concern here. Quite the opposite actually. After a patchy history leading up to the financial crisis, Prospect has recently been very good at lending money to small and medium sized companies, and collecting more interest than it pays to borrow. This simply gives the company more capital to do just that.

The safest 13.5% dividend you can buy?
Prospect pays its dividend like clockwork, and actually hasn't reduced the payment amount since it began making monthly payments in 2010. In fact, the company has declared its payments all the way through December, and that will mark the 54th consecutive dividend increase for the company.

Now, not all of the businesses Prospect invests in are the most creditworthy companies in the world. If they were, they wouldn't be willing to pay Prospect so much interest.

However, Prospect's investment portfolio consists of the debt or equity of more than 125 companies, and it continues to add to the diversity. So, even if one of the companies defaults on their debt, it wouldn't be too big of a deal to Prospect's bottom line.

Prospect may just be the safest high-yielding play you can buy today, and it is still on sale.

Are these stocks a better investment than Prospect?
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

Matthew Frankel owns shares of Prospect Capital. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers