XLRE - Prospect Capital: Lack Of Distribution Increases Limits Appeal

2024-06-28 07:04:34 ET

Summary

• PSEC offers a high distribution yield of 12.8% and trades at a significant discount to its net asset value. However, this discount doesn't necessarily mean that PSEC is a buy.
• The majority of PSEC's investments are within the real estate sector, which may be impacted by rising interest rates.
• PSEC's dividend has remained the same since 2017, showing inconsistent growth compared to peers, especially internally managed BDCs.
• On a positive note, non-accruals still remain low at 0.4% of fair value.

Overview

I previously covered Prosect Capital ( PSEC ) back in March and downgraded my rating to a hold due to the BDC's growing vulnerabilities surrounded the prolonged period of elevated interest rates. I wanted to revisit the business development company after its most recent earnings and reassess valuation based on the performance and growth of its net assets. I also wanted to provide some thoughts as I believe that the possibility of interest rate cuts are higher now. We can see that the price of PSEC has fallen by 47% over the last decade. However, the high distribution yield has helped offset this price deterioration and provides a total return of 71% over the same period....

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