Triangle Capital Vs Prospect Capital - Scorecard

By Chad Henage - May 3, 2012 | Tickers: PSEC, TCAP | 0 Comments

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If you already own a company, it always makes sense to watch that company's competition. This makes sense not only to ensure you know what competitive threats are on the horizon, but also because sometimes the competitor might be a better investment. This is what brings me to compare Triangle Capital Corporation (NYSE: TCAP) and Prospect Capital Corporation (NASDAQ: PSEC). I already own Triangle Capital, and I recently read an article by fellow fool Selena Maranjian that detailed the hefty dividends in small asset managers. Prospect pays a dividend that is similar to Triangle Capital, and that is what attracted me to TCAP in the first place. Both companies invest in the small to middle market in lending and equity positions. I'm curious to know which of the two companies is the better investment.
  

Nm = not material 

Comparing the two companies on the basis of PEG ratio, the numbers are hard to argue. Triangle has positive expected growth, Prospect is expected to have flat growth going forward. A large part of this has to do with the number of loans held by Prospect that are on non-accrual status. As of the end of 2011, there were 11 different loans on non-accrual. With this drag on potential future earnings, it's not hard to understand why analysts are calling for flat EPS growth. (Triangle – 2, Prospect – 1)

Since both companies operate in the same general industry, you would expect their prior growth rates to be similar. Nothing could be further from the truth. Triangle has been growing EPS by over 16% in the last 5 years, while Prospect has seen EPS contract by over 10%. This large difference is mainly attributable to the fact that Prospect had to write off large losses in both 2009 and 2010 which hurt results. With the better prior growth rate, Triangle wins this category as well. (Triangle – 2, Prospect – 1)

When comparing companies, I always look at their performance versus analyst estimates. If one company beats estimates on a regular basis, the stock will usually sell at a premium due to this outperformance. Look at the difference in the two companies over the last four quarters:
 

You can see that not only has Triangle beaten estimates on a more consistent basis, but they have also beaten estimates by a wider margin. (Triangle – 2, Prospect – 1)

Since both companies pay hefty dividends, this is a critical part of our analysis. While current yield is one part of the puzzle, dividend growth and payout ratio play at least as important of a role when choosing stocks. Look at how the two companies stack up:
 

While Prospect has the higher yield and the lower payout ratio, this isn't quite the winning combination you would expect. First, both companies are supposed to pay out at least 90% of their earnings to avoid excise taxes. By paying out less than 90%, Prospect made the choice to pay some excise taxes to maintain these funds for future capital allocation. Secondly, while Triangle pays a lower yield, their dividend growth has been nothing short of amazing. The higher payout ratio at Triangle isn't a concern like it would be for a traditional company because of their structure. If Prospect had not cut their dividend in 2010 when they went to monthly payouts, this category would be closer. The fact that Prospect cut their dividend says this could happen again. Triangle shareholders haven't had to worry about that. (Triangle – 2, Prospect – 1)

Last but not least, we need to compare the two companies balance sheets. With a debt-to-equity ratio of 0.72, Triangle is more highly leveraged than Prospect, which has a debt-to-equity ratio of 0.49. Less leverage gives the company more flexibility and safety. (Triangle – 1, Prospect – 2)

At the end of the day, Triangle scores a 9 and Prospect scores a 6. It seems like Triangle is the much better bet. The company sells for less than its growth rate, pays an impressive dividend, and has been raising its dividend at a rapid rate. So if you're looking for, “A Nice Boring 9% Yield” as I've said before, look no further than TCAP. I've had real money in TCAP for a little while, and I've also marked the stock to outperform the broader market on CAPSCall. Let me know what you think in the comments section below.

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