Prospect Capital Corp. (NASDAQ:PSEC) Cuts Dividends


The annual rate of the monthly dividend of Prospect Capital Corp. (NASDAQ:PSEC) would be reduced to $1.00 per share from $1.33. The reduced dividend would allow the company to arrive a steady earnings power. The new rate of the dividend would be easily overcome by the net investment income, as Prospect Capital Corp. (NASDAQ:PSEC) revealed. Several different responses were seen at the announcement:

  • One month ago, in a conference call, Prospect Capital Corp. (NASDAQ:PSEC) said that they would continuously pay the dividend from its taxable income. It is strange that the dividend was reduced soon after. In the future, the taxable income and the net income would converge. Prospect Capital Corp. (NASDAQ:PSEC)’s dividend policy based on the net income is much more favorable than the one based on taxable income. The company understands this aspect.
  • This cut in dividend came soon after the annual meeting of Prospect Capital Corp. (NASDAQ:PSEC). In the meeting, the company asked the investors to approve issuance of shares under the net asset value. If the investors had known about this near-future cut in dividends at the time of the meeting, they would have taken longer to approve this proposal. So, the timing of the cut is very bad and very suspicious.
  • When you talk about externally managed companies, insider buying is not significant. Consider this:

o   On 2 Dec, the CFO of Prospect Capital Corp. (NASDAQ:PSEC) bought 162,500 shares in the company at $9.12 a share. The total purchase was valued at around $1.5 million.

o   On 5 Dec, Prospect Capital Corp. (NASDAQ:PSEC) held their annual meeting.

o   On 8 Dec, the company cut its dividends. The share price in the last trade-day was $8.27.

The CEO and the COO of Prospect Capital Corp. (NASDAQ:PSEC) also bought shares in the first two days of December. They were well-aware of the future cuts in dividends. This looks more like showmanship than anything else.

If you take a look at the recent history of the industry, it will become obvious that insider share-buying occurs just before the company breaks bad news.

  • Prospect Capital Corp. (NASDAQ:PSEC) suspended sales through their at-the-market program. The company backed this announcement with the current discount to net asset value. The company would not be floating its shares in the market when they are priced at 22% lesser than their book value. This is not a big deal; the suspension is just temporary.
  • Prospect Capital Corp. (NASDAQ:PSEC) frequently file paperwork with the SEC. In a recent filing, the company discussed its investment activity in detail, which has brought only losses to the company since 30th September.

Prospect Capital Corp. (NASDAQ:PSEC)’s cut in dividend was necessary. But the cut was timed wrongly; it was announced a month after the management team realized that the current rate was sustainable. This is enough reason for investors to avoid the company. The whole thing looks very suspicious; only bad news can follow.

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