A 13% yield -- these days or any other -- is impressive for any company. Fewer than 50 out of the thousands listed on U.S. exchanges can match that payout.
Such a robust yield is a show-stopper on its own, but this company's dividend growth is also impressive. Not only has the dividend increased every quarter since the company's 2004 initial public offering, but the pace of those increases amounts to a +33% annual growth rate.
In dollars-in-your-pocket terms, that means the dividend doubles every two-and-a half years.
Prospect Capital Corp. (Nasdaq: PSEC) is a $700 million New York-based private-equity firm that has non-controlling debt and equity investments in about 60 private companies.
The company is registered as a "business-development" company, which essentially means that it's a venture-capital firm that ordinary investors can participate in. This status gives Prospect certain perks and limitations: Business-development companies must pay at least 90% of their taxable earnings to shareholders. They're also legally required to keep their debt levels below equity levels.
Prospect was founded in 1988. It invests in small firms in the United States and Canada across all industry sectors. Its latest filing showed oil-and-gas production comprised 17.4% of its interests, its largest concentration, followed by manufacturing (11.9%), health care (9.6%) and mining (8.7%).
Earnings have been inconsistent during the past two years, and Prospect posted 2Q and 3Q losses in 2009. Several factors, however, suggest that the long-term future will be brighter than the immediate past.
First, Standard & Poor's recently gave Prospect an investment-grade rating, which improves its access to capital and lowers the cost.
Second, Prospect expects its recent acquisition of Patriot Capital to pay off. Prospect has said the acquisition will add $0.09 of net investment income -- or more -- per quarter per share, which would have increased the company's earnings per share during the past twelve months by more than +30%.
The Patriot Capital acquisition, completed in December 2009, added 30 companies to Prospect's investment portfolio for a price of $197 million. Patriot's total price, as estimated by Prospect, was a good deal -- just 63% of asset cost and 75% of asset book value. The deal grew Prospect's assets by +35%.
Even with this acquisition, Prospect's debt-to-equity ratio will remain low, allowing it to finance more deals going forward. While continued weaknesses in the economy threaten some of Prospect Capital's investments in the short term, its diversified portfolio, strong balance sheet and growth prospects make the company a great play for risk-tolerant investors looking for big yields.