Please ensure Javascript is enabled for purposes of website accessibility

Prospect Capital Corp.: Dilution Approved

By Jordan Wathen - Dec 5, 2014 at 7:27PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Prospect Capital shareholders approve the company's below-NAV stock sales.

Earlier today, Prospect Capital Corp. (PSEC 0.99%) tallied up the votes on a proposal to allow the company to sell shares at prices under its net asset value -- book value.

The results are in. Shareholders voted to approve the proposal by a wide margin:

For

Against

Abstained

Broker non-votes

71.9%

26.1%

2%

0% (only 28 votes)

Source: SEC filings.

Why it matters
Business development companies like Prospect Capital grow largely by issuing new shares to the public. By law, a BDC can only issue shares when its stock trades above net asset value, or book value. The idea is that any share issuance should maintain or increase net asset value per share. However, with shareholder approval, a BDC can issue shares even when its stock trades below net asset value.

Prospect Capital asked shareholders for the right to issue an unlimited amount of shares at prices under net asset value at this year's annual meeting. After approval from shareholders, the company can issue new shares, at any time, and at any price, regardless of its impact on its current investors.

What happens next?
The net effect of this proposal will ultimately be determined by how many shares Prospect inevitably sells at prices below net asset value. If it doesn't sell any shares at dilutive prices, it will have no real impact at all.

If, however, it makes aggressive use of below-NAV stock issuance, book value could theoretically go to zero. That's the difficulty of quantifying a power that has no bounds.

History provides evidence that Prospect Capital issues shares at prices under NAV. It did so recently when it sold millions of shares in September and October of 2014, which reduced net asset value by roughly $0.02 per share. Before that, it sold millions more shares in 2011 to make new investments. For the full fiscal 2011 year, stock issuance reduced its NAV by $0.16 per share.

How this will impact shareholders going forward is anyone's best guess. But one thing is certain: Great powers require great responsibility. Investors owe it to themselves to watch Prospect Capital's share count like a hawk. Each dilutive share sold represents a massive transfer of wealth from current shareholders to new shareholders.

Jordan Wathen has no position in any stocks mentioned. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Prospect Capital Corporation Stock Quote
Prospect Capital Corporation
PSEC
$8.13 (0.99%) $0.08

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
389%
 
S&P 500 Returns
125%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/13/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.