Analyzing Federated Hermes (NYSE:FHI) and Prospect Capital (NASDAQ:PSEC)

Prospect Capital (NASDAQ:PSEC) and Federated Hermes (NYSE:FHI) are both finance companies, but which is the superior business? We will contrast the two businesses based on the strength of their institutional ownership, earnings, valuation, dividends, profitability, risk and analyst recommendations.

Dividends

Prospect Capital pays an annual dividend of $0.42 per share and has a dividend yield of 19.3%. Federated Hermes pays an annual dividend of $1.52 per share and has a dividend yield of 2.7%. Prospect Capital pays out 840.0% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Federated Hermes pays out 28.3% of its earnings in the form of a dividend. Federated Hermes has increased its dividend for 4 consecutive years.

Institutional & Insider Ownership

9.1% of Prospect Capital shares are owned by institutional investors. Comparatively, 75.9% of Federated Hermes shares are owned by institutional investors. 0.0% of Prospect Capital shares are owned by company insiders. Comparatively, 4.2% of Federated Hermes shares are owned by company insiders. Strong institutional ownership is an indication that endowments, large money managers and hedge funds believe a company will outperform the market over the long term.

Analyst Ratings

This is a breakdown of current ratings and price targets for Prospect Capital and Federated Hermes, as reported by MarketBeat.com.

	Sell Ratings	Hold Ratings	Buy Ratings	Strong Buy Ratings	Rating Score
Prospect Capital	2	0	0	0	1.00
Federated Hermes	1	4	1	2	2.50

Prospect Capital currently has a consensus target price of $2.00, suggesting a potential downside of 8.26%. Federated Hermes has a consensus target price of $57.40, suggesting a potential upside of 0.56%. Given Federated Hermes’ stronger consensus rating and higher possible upside, analysts clearly believe Federated Hermes is more favorable than Prospect Capital.

Volatility and Risk

Prospect Capital has a beta of 0.8, suggesting that its share price is 20% less volatile than the S&P 500. Comparatively, Federated Hermes has a beta of 0.65, suggesting that its share price is 35% less volatile than the S&P 500.

Profitability

This table compares Prospect Capital and Federated Hermes’ net margins, return on equity and return on assets.

	Net Margins	Return on Equity	Return on Assets
Prospect Capital	19.33%	12.15%	5.54%
Federated Hermes	21.30%	34.03%	18.54%

Valuation and Earnings

This table compares Prospect Capital and Federated Hermes”s top-line revenue, earnings per share (EPS) and valuation.

	Gross Revenue	Price/Sales Ratio	Net Income	Earnings Per Share	Price/Earnings Ratio
Prospect Capital	$639.45 million	1.79	$153.66 million	$0.05	43.60
Federated Hermes	$1.80 billion	2.37	$403.30 million	$5.38	10.61

Federated Hermes has higher revenue and earnings than Prospect Capital. Federated Hermes is trading at a lower price-to-earnings ratio than Prospect Capital, indicating that it is currently the more affordable of the two stocks.

Summary

Federated Hermes beats Prospect Capital on 15 of the 18 factors compared between the two stocks.

About Prospect Capital

Prospect Capital Corporation is a business development company. It specializes in middle market, mature, mezzanine finance, later stage, emerging growth, leveraged buyouts, refinancing, acquisitions, recapitalizations, turnaround, growth capital, development, capital expenditures and subordinated debt tranches of collateralized loan obligations, cash flow term loans, market place lending and bridge transactions. It also makes real estate investments particularly in multi-family residential real estate asset class. The fund makes secured debt, senior debt, senior and secured term loans, unitranche debt, first-lien and second lien, private debt, private equity, mezzanine debt, and equity investments in private and microcap public businesses. It focuses on both primary origination and secondary loans/portfolios and invests in situations like debt financings for private equity sponsors, acquisitions, dividend recapitalizations, growth financings, bridge loans, cash flow term loans, real estate financings/investments. It also focuses on investing in small-sized and medium-sized private companies rather than large public companies. The fund typically invests across all industry sectors, with a particular expertise in the energy and industrial sectors. It invests in aerospace and defense, chemicals, conglomerate services, consumer services, ecological, electronics, financial services, machinery, manufacturing, media, pharmaceuticals, retail, software, specialty minerals, textiles and leather, transportation, oil and gas production, coal production, materials, industrials, consumer discretionary, information technology, utilities, pipeline, storage, power generation and distribution, renewable and clean energy, oilfield services, healthcare, food and beverage, education, business services, and other select sectors. It prefers to invest in the United States and Canada. The fund seeks to invest between $10 million to $500 million per transaction in companies with EBITDA between $5 million and $150 million, sales value between $25 million and $500 million, and enterprise value between $5 million and $1000 million. It fund also co-invests for larger deals. The fund seeks control acquisitions by providing multiple levels of the capital structure. The fund focuses on sole, agented, club, or syndicated deals.

About Federated Hermes

Federated Hermes, Inc. is a publicly owned investment manager. Through its subsidiaries, the firm provides its services to individuals, including high net worth individuals, banking or thrift institutions, investment companies, pension and profit sharing plans, pooled investment vehicles, charitable organizations, state or municipal government entities, and registered investment advisors. Through its subsidiaries, it manages separate client-focused equity, fixed income, balanced and money market mutual funds along with separate client-focused equity, fixed income, money market, and balanced portfolios. Through its subsidiaries, the firm invests in the public equity and fixed income markets across the globe. It invests in growth and value stocks of small-cap, mid-cap, and large-cap companies. The firm makes its fixed income investments in ultra-short, short-term, and intermediate-term mortgage-backed, U.S. Government, U.S. corporate, high yield, and municipal securities. It employs both fundamental and quantitative analysis to make its equity investments. Federated Hermes, Inc. was founded in 1955 and is based in Pittsburgh, Pennsylvania with additional offices in New York City and London, United Kingdom.