You Asked… Is This 12.5% Yielder Safe?

Marc Lichtenfeld By Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Safety Net

Without a doubt, I get more requests to analyze the dividend safety of Prospect Capital Corp. (Nasdaq: PSEC) than I do for any other stock.

The monthly dividend that yields 12.5% annually is a big reason for that.

But should shareholders expect to continue to receive that $0.083 per share dividend every month?

Let’s see what SafetyNet Pro thinks…

What Is SafetyNet Pro?

SafetyNet Pro is a groundbreaking tool that predicts dividend cuts and raises with stunning accuracy. With it, you can determine the dividend safety rating of nearly 1,000 stocks. Access to SafetyNet Pro is reserved exclusively for subscribers of Marc’s newsletter, The Oxford Income Letter. To learn more about SafetyNet Pro and The Oxford Income Letter, click here now.

Prospect Capital is a business development company (BDC) that invests in debt and equity across a wide range of businesses and industries. It has more than $6 billion in assets and has funded more than 300 businesses.

The first things that jump out at me (and SafetyNet Pro) are two dividend cuts, one in 2010 and another in 2015.

To me, there is nothing worse for a dividend payer than a management team that cuts the dividend. And if the dividend has been reduced more than once, that is a strong signal that management won’t hesitate to do it again.

So those are two big strikes against it – even before we look at the fundamentals.

The financials aren’t too bad. In 2016, the company generated $590 million in net interest income (NII), the best measure of cash flow for a BDC. During the year, it paid out $336 million for a very manageable payout ratio of 57%.

The payout ratio is the percentage of earnings (I use cash flow) that is paid out in dividends.

This year, the payout ratio is expected to climb to 66%, which is still within my comfort zone of 75% or lower.

However, the payout ratio is going higher, not because of a larger dividend payout, but because NII is forecast to slide 14%.

SafetyNet Pro penalizes a company that makes less money than it did the year before. It’s not a given that a company will be able to sustain its dividend if cash flow is falling.

So while Prospect Capital can afford its dividend today, its history of cutting dividends and its NII trajectory are not inspiring confidence that it will be able to sustain the dividend in the future.

I wish I had better news, since so many of you like the stock. But the dividend cannot be considered safe.

Dividend Safety Rating: F

If you have a stock whose dividend safety you’d like me to analyze, leave the ticker symbol in the comments section.

Good investing,