Another quarter and another major buyback by American Capital, Ltd (NASDAQ:ACAS). The company announced it has now repurchased 61.4M shares since shifting from paying dividends back in Q3 2011. The total buyback has amounted to $623M over the last 7 quarters at an average discount to a continuously soaring NAV of nearly 40%. Nonetheless, the stock continues to trade at a substantial discount even after demonstrating to the market every quarter that it has the financial ability to spend that much cash.
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 $18.6 billion of assets, including assets on its balance sheet and fee earning assets under management by affiliated managers, with $117 billion of total assets under management (including levered assets).
Investors continue to allow the stock to trade at the dramatic discount to the assets of American Capital such that the company spent a record $128M on the buyback in Q1 alone. As previous articles suggested, investors are missing out, as an increasing stock price isn't slowing down the buyback. The prospects of the managed assets and financed investments continue to improve.
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.
Since the start of the buyback plan, the company has purchased 61.4M shares, or 17.8% of the outstanding shares. The average purchase price has been $10.16 which totaled $623M. The purchases have been $1.09 per share accretive to the NAV through December 31st 2012. The total should increase to between $1.20 and $1.30 with the Q1 additions.
The average repurchase was done at a 40% discount to the estimated current NAV. Though the discount is now shrinking to the 20% range, the plan continues to work brilliantly. The table below highlights how the history of the stock gains can't seem to catch up with the increases in NAV regardless of the substantial buyback:
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One of the issues is that the main reason for investing in BDCs is for the dividends. Even fellow contributor focused on BDCs, BDC Buzz, rates the company at the bottom of the group mainly due a payout score of 0. The argument should be that American Capital has had a buyback equivalent to a 10% payout ratio giving the company a significant payout score instead of a 0.
Strong Stock Returns
Since the initiation of the buyback plan on July 1st, 2011, the company has had significant returns easily outpacing the S&P 500. As the chart below shows, any investor buying on the initial dip after the buyback announcement at the end of 2011 made significantly higher gains:
American Capital continues to offer substantial value over investing in just about any stock or other BDCs. The stock currently requires a 25% gain to reach an estimated end of Q1 NAV in the low $18 range. As the above table highlighted, the buyback has provided substantial gains to investors. The original quarter averaged purchases at only $8.21 while the NAV has now soared from $11.92 to likely over $18. Those original purchases were brilliant as it provided a much better investment than a portfolio company with a 10-15% ROI.
The previous articles even suggest the company is being conservative on the valuations of the assets the company owns. Clearly investors are still concerned by how the NAV and stock crashed during the financial crisis, but the company has significantly reduced leverage and the long-term hit to NAV suggests a lot of the valuations used in the worst crisis in the recent financial times were overdone. Unless you think the NAV is going to crash 25%, investors should continue loading up on the stock.
Disclosure: I am long ACAS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.