Prospect Capital: We Do Not Believe Current Levels Are An Attractive Entry Point, Says Wells Fargo


In a research report released today, Wells Fargo analyst Jonathan Bock reaffirmed a Market Perform rating on Prospect Capital (NASDAQ:PSEC), following the company’s announcement of a 24.7% dividend reduction. No price target was provided.

Bock wrote, “We don’t think the event should come as a surprise. Recall, Quartile 4 BDCs are characterized as potential higher-risk BDCs given (1) ownership of highly levered assets (i.e., PSEC’s 19% ownership of CLOs), (2) low levels of dividend coverage from stable cash flow, (3) a propensity to issue expensive/dilutive equity capital (i.e. PSEC issued dilutive equity in 2014), and MOST OF ALL (4) management’s willingness to charge an outsized management fee relative to the performance delivered”

The analyst continued, “We do not believe current levels are an attractive entry point for the stock as PSEC is realizing losses on their CLO book and this may pose downside risk to NAV in the near term. Overall, we applaud management for rightsizing a dividend. In our view, the next stop in value creation should be an alignment/reduction of the management and incentive fee. Investors in PSEC will now receive 25% less in monthly income based on decisions made by this management team. Thus, investors may be obliged to tell the board to reduce manager compensation in the same manner, in our view.”

According to TipRanks.com, which measures analysts’ and bloggers’ success rate based on how their calls perform, analyst Jonathan Bock has a total average return of -0.4% and a 50% success rate. Bock is ranked #2342 out of 3429 analysts.

 

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