The market remains so uninterested in buybacks that a company can continuously buy its own stock at a substantial discount to net asset value [NAV]. American Capital, Ltd (ACAS) is a prime example, having recently completed an 8.8M share buyback in Q4 that will again help boost the NAV.
The company bought the stock at an average price of $11.72, for a total cost of $103M. In the previous quarter, substantial purchases below book value added $0.23 to NAV. The NAV stood at $17.39 prior to the quarter's start, so it undoubtedly added to that value.
American Capital is a private equity firm and global asset manager. American Capital, both directly and through its asset management business, originates, underwrites and manages investments in middle market private equity, leveraged finance, real estate and structured products. American Capital manages $17.2 billion of assets, including assets on its balance sheet and fee earning assets under management by affiliated managers, with $101 billion of total assets under management (including levered assets).
The question remains why investors don't like the stock at the dramatic discount to the assets of the company.
Buyback and Dividend Plan
American Capital has one of the most appealing plans for handling the distribution of cash to shareholders. When the company transitioned to the C-Corp back in 2011, the Board of Directors came up with a plan to only pay dividends when the stock traded above NAV. The flexibility to buy stock when it trades at a significant discount to NAV is a very lucrative one.
All companies should have flexible capital allocation plans established. Unfortunately, the nature of the dividend concept has forced companies into a structure of paying consistent dividends no matter the benefits to shareholders. Not to mention outside of REITs, MLPs, or RICs, companies tend to pay dividends substantially less than financially feasible as to not be forced into reducing payouts in the future.
Including the Q4 buyback mentioned above, the company has purchased 52.4M shares, or 15.2% of the outstanding shares. The average purchase price has been $9.46 and totaled $495M. Through September 2012, the purchases were $0.90 per share accretive to the NAV.
The average repurchase was done at a 46% discount to the current NAV. Though not nearly as big of a discount to the current stock price of around $12.75, the plan has worked brilliantly.
Soaring Net Asset Value
The NAV continues to soar as the stock price trickles higher. The NAV at the end of 2011 was $13.87. As mentioned in the previous article, the expectation based on Q3 stock buybacks, earnings, and likely portfolio asset appreciation, the NAV was expected to top $17. In fact, the NAV hit $17.39. The stock though continues to languish significantly below NAV. It would need to appreciate another 36% to equal the NAV as of September 30th. This NAV doesn't even factor in any gains since October.
Another interesting point is that American Capital trades at a substantial discount to other Business Development Companies [BDC] such as Ares Capital (ARCC) and Main Street Capital (MAIN), that both trade above NAV. The stock would need to gain 50% to reach these NAV levels. See chart below:
A major reason for the rebound in NAV was the strong rebound in unrealized gains from portfolio companies including publicly traded American Capital Agency (AGNC) and American Mortgage Corp. (MTGE) and European Capital. The publicly traded companies took a hit in Q4, but European Capital is only valued at 75% of NAV, allowing for potential gains in the future quarters.
The stock had flatlined since first hitting $12 in September, while the company continued to execute massive buybacks and increase the NAV. It has now been on a tear in the first week of the year. American Capital has been less volatile than the portfolio companies, but the gains have been in-line with the other BDCs and much higher than the weakness in the portfolio companies.
The following chart compares the stock to the portfolio companies and the BDCs over the last quarter.
American Capital continues to offer substantial value over investing directly in the portfolio stocks or competitors in the sector. While investors remain concerned about the ability of the company to execute or the lack of a dividend, it hasn't stopped the company from producing strong gains for investors in 2012.
The question remains whether it will rebound to trade at similar multiples of NAV as the competition. For investors buying now, the large stock buyback will juice gains even further than the market.
Disclaimer: Please consult your financial advisor before making any investment decisions.