On the same day many Prospect Capital Corporation (NASDAQ:PSEC) shareholders are receiving a proxy statement in the mail, the company announced some good news. It will cover its dividends in the current quarter thanks to "tax-based income" from the monetization of aircraft assets at a portfolio company.
But don't let that be a reason to skip reading the proxy filings. In reading the proxy, you'll learn Prospect Capital Corporation is issuing shares under net asset value, and it wants your permission to keep doing it.
The nitty gritty of stock dilution
Tucked away on page 18 of a recent proxy filing, the company lists all of its previous sales of stock at prices under net asset value.
Here's that table.
Note the last entry: Sept. 8-9, 2014. On those days, Prospect Capital sold 911,684 shares at dilutive prices.
Unfortunately, the proxy filing was dated one day after the dilutive sales, Sept. 10, so we don't know how many shares were or are being sold at prices under net asset value today. We do know, though, that Prospect Capital's last-reported NAV was $10.56 per share, and the company's stock has traded under NAV since the filing.
We also know that Prospect Capital is doing the selling through an at-the-market program, which gives the company the right to sell up to 50 million shares. Finally, we know that the current authorization to sell new shares at prices under NAV will expire on Dec. 6.
In short, it's hard to believe that the sales on Sept. 8-9 were one-time in nature, given the capacity in the ATM program and its willingness to grow its balance sheet. Each sale at current prices is making shareholders poorer. After all, it's hard to get rich selling assets worth $10.56 for $10.34 to 10.46, as Prospect Capital is doing.
Prospect Capital's own management has spent the better part of the past few years eschewing sales below net asset value, suggesting that it merely wanted the option to do so for extraordinary periods -- times when the cash raised from dilutive offerings was worth the hefty price.
This isn't one of those times. Given the company's recent inability to cover its dividends with earnings, selling shares below NAV is the exact opposite of what it should be doing.
Your shares are losing value with each new share sold, making you poorer, and management richer.
Jordan Wathen and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.