One of the more frequent inquiries I receive at High Yield Wealth involves a dividend-paying stock we no longer recommend. I understand why investors seek my opinion on this stock: 1) High Yield Wealth is an income-centric publication, so I track many income investments; 2) this stock is a former recommendation.14% dividend

Prospect Capital Corp. (NASDAQ: PSEC) is the stock, and the dividend it pays yields over 14%.

Prospect is a business development company (BDC). Its goal is to borrow low and then lend high, mostly to middle-market companies. The spread it earns is paid to investors as dividends.

[ad#Google Adsense 336×280-IA]A 14% dividend yield captures income-investor interest.

Interest is further piqued by Prospect’s value proposition.

Its shares trade at a 27% discount to net asset value (NAV).

Insider buying is another drawing point. Over the past three months, insiders have bought over 7.8 million Prospect shares.

If we cover a full year, the tally exceeds 15.7 million.

It appears that Prospect management is all in on the company it manages. Does that mean you should be all in, too?

I’m somewhat less impressed by the current discount and insider buying than most. Yes, Prospect shares trade at a significant discount to NAV, but the discount doesn’t automatically imply value. Over the past four years NAV has trended lower, dropping from $10.88 per share to today’s $9.65.

As for all that insider buying, that’s nothing new. I’ve seen insiders “heavily” buy Prospect shares from $12 down to $6. The purchases have failed to make a whit of difference in investor sentiment or the share price. Down has been the predominant price trend, despite all the insider buying. (Call me cynical, but Prospect management has historically charged the highest management and performance fees in the industry. I’ve come to view insider share purchases as window dressing.)

Down has also been the trend in dividends. Today, Prospect pays $1 per share in annual dividends. In the first half of 2009 and the second half of 2010, four quarterly dividends totaled $1.64 a share.

In the second half of 2010, Prospect switched to monthly payouts from quarterly payouts. The monthly payout was set at $0.10 a share. The math isn’t difficult: Prospect cut the dividend payout 27%. A switch to a more convenient monthly distribution hardly compensates for the difference.

Post-2010, Prospect raised the dividend a fraction of a cent every quarter until it reached the monthly payout of $0.11 a share by 2015. But in March of that year, the payout was slashed to $0.0833 per share. Over the past six years, Prospect’s dividend has been reduced 39%.

And as the dividend goes, so goes the share price. Prospect went public in 2004 at $15 a share. Today, the shares changes hands at $7 a share. When management broaches Prospect’s value proposition, it always focuses on the dividend yield. The yield is always double-digit. But lost in translation is the fact the perpetual double-digit yield is the product of a downward spiraling share price.

In the last analyst meeting, following release of quarterly financial results, Prospect Chairman and CEO John Barry was keen to say, “Since our IPO 12 years ago through our April 2016 distribution at the current share count, we will pay out over $14.62 per share to initial continuing shareholders and over $1.85 billion in cumulative distributions to all shareholders.”

To which I riposte, “Big deal.” Over the past 12 years, initial continuing shareholders have lost $8 – 53% – of their initial share price.

As for cumulative dividends, yes, the amount creeps ever higher with each payout, but so has share count. Today, Prospect has 355 million shares outstanding. Five years ago, 86 million shares were outstanding. Unfortunately for long-time Prospect shareholders, many of these new shares were issued and sold below NAV.

But that was yesterday. What about today? Is Prospect’s 14% dividend yield worth the risk?

My answer, as it is for High Yield Wealth readers, is “no.” The aforementioned stated facts are why I recommended selling Prospect last June.

I’m also skeptical about management’s ability to create future value. Last year, management chatted up all the wonderful value that was to be unleashed in a rights offering for Prospect’s online lending, collateral loan obligation and real estate assets. So far, nothing.

When you lose faith in a financial company, it’s best to walk away and stay away. I’ve long ago lost faith in Prospect Capital. (But not these solid dividend payers.)

— Stephen Mauzy

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Source: Wyatt Investment Research