Is Another Cut Coming for This 12% Yielder?

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

Safety Net

Business development company Prospect Capital Corp. (Nasdaq: PSEC) is wildly popular among income investors for its robust 12% yield.

The last time I covered the stock, a little more than a year ago, its dividend safety rating was upgraded to a C from a D.

Can its momentum continue, or should investors start to worry?

Prospect Capital makes loans and invests in privately held companies.

In my November 2015 report, I mentioned that the company cut its dividend in January 2015. Its newly reduced dividend was in line with its net investment income (NII). Previously, it exceeded it.

I said that as long as the company maintained its current level of net investment income, paying dividends shouldn’t be a problem – though there wasn’t much wiggle room.

Prospect pays shareholders $0.0833 per share monthly for a quarterly dividend of $0.25.

The company made $0.25 and $0.26 per share in NII during the first two quarters of 2016, respectively. However, in the third quarter, NII dropped to $0.22 due to the sale of one of its investments.

That’s a concern.

As I mentioned last year, the company didn’t have much wiggle room… and in the most recent quarter, Prospect wiggled.

NII is expected to decline this year.

Additionally, the dividend cut in 2015 shows that the dividend is not untouchable. Management will lower it if necessary.

Those two items are negatives to SafetyNet Pro.

In the meantime, three-year NII growth has been positive. And this year, it has generated enough to pay the dividend.

For now, Prospect Capital’s dividend safety remains unchanged. But it’s on thin ice.

Another quarter of subpar performance and I’d expect a downgrade. I’ll be keeping an eye on this one.

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Dividend Safety Rating: C

I hope everyone has a wonderful Christmas. Talk to you next week.

Good investing,