Buy The BDC With A Buyback Yield Of 13%

| About: American Capital (ACAS)

The major buyback by American Capital, Ltd (NASDAQ:ACAS) continued unabated in the second quarter. The company announced it has now repurchased 70.4M shares since shifting from paying dividends back in Q3 2011. The total buyback has amounted to $748M over the last 8 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 $21.2 billion of assets, including assets on its balance sheet and fee earning assets under management by affiliated managers, with $112 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 near record $125M on the buyback in Q2 alone. Over the last four quarters, the company has spent $478M on buybacks for a yield of 12.6%. 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 70.4M shares, or 20.4% of the outstanding shares. The average purchase price has been $10.63 and totaled $748M. The purchases have been $1.23 per share accretive to the NAV through March 31, 2012. The total should increase to between $1.30 and $1.40 with the Q2 additions.

The average repurchase was done at a nearly 40% discount to the estimated current NAV. Though the discount is now shrinking to around the 30% range, the plan continues to work brilliantly. The below table highlights how the history of the stock gains can't seem to catch up with the increases in NAV regardless of the substantial buyback:

Click to enlarge

Strong Stock Returns

Since the initiation of the buyback plan on July 1, 2011, the company has had significant returns that had easily outpaced the S&P 500 until the recent losses. 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:

ACAS Total Return Price Chart

ACAS Total Return Price data by YCharts

Conclusion

American Capital continues to offer substantial value over investing in just about any stock or other BDCs. With the recent declines, the stock currently requires a 35% gain to reach an estimated end of Q2 NAV in the mid $19 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 $19. Those original purchases were brilliant as it provided a much better investment than a portfolio company with a 10-15% ROI. Investors should load up on this stock as it now offers a buyback yield of nearly 13%.

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.