With the stock continuously trading below net asset value (NAV), American Capital, Ltd (ACAS) keeps the buyback roaring quarter after quarter. As the company continues to plod along with positive earnings, a growing NAV, and substantial assets under management, it remains puzzling that investors are unwilling to pay fair value for the stock.
American Capital is a private equity firm and global asset manager. The company owns over 40 businesses and manages $21 billion of assets, including through an affiliate it manages publicly traded American Capital Agency Corp. (AGNC) and American Capital Mortgage Investment Corp (MTGE).
The ironic part about the situation is that market has been infatuated with especially American Capital Agency and its substantial yields from being a mortgage REIT, or mREIT, yet American Capital is mostly ignored though it earns management fees from those assets. In total, American Capital Asset Management is now worth nearly $1 billion and American Capital will benefit greatly from expanding the asset base in the future.
Buybacks Continue To Roar
It what has to be near unprecedented, American Capital continues to purchase a substantial amount of stock each and every quarter. In the latest quarter, it actually spent a record $175.5 million on buybacks or nearly $50 million more than any previous quarter since the plan began in Q311. Another 13.4 million shares were repurchased or 4.6% of the total outstanding shares bringing the total buybacks to nearly 84 million shares.
The interesting part continues to be the doubts about the benefits of the share repurchase plan over paying a dividend and the continued concerns about stock options diluting the benefits of the buybacks. In the below table used in previous articles to highlight the buyback levels, the table has been updated to include the listed average diluted outstanding shares for each quarter:
The clear take away from the diluted shares analysis is that stock options have reduced the benefit from the massive buybacks. The roughly 70 million shares repurchased prior to Q3 probably saw a roughly 55 million share reduction (remember the listed totals are average shares outstanding during the quarter and not the absolute amount at the end of the quarter). The major fallacy to the negative mindset is that the shares would've been issued for compensation regardless. One might be able to argue that management is able to disguise the amount of the stock options with the buyback overriding anything issued, but again these arguments don't hold water. Any additional shares always impact EPS and NAV numbers and ultimately management is graded based on those two numbers.
Buyback Versus Dividend Debate
The debate between stock buybacks and dividends is probably not more divisive than with American Capital and the two public vehicles that it manages. Both American Capital Agency and American Capital Mortgage pay substantial dividends while American Capital has a massive buyback. Both of the dividend payers have recently announced the Q3 dividend amounts and investors clearly expect future cuts considering both dividend yields sit at around 14%. Ironically though both have started stock buyback plans that included significant purchases during Q3.
American Capital Agency declared a $0.80 per share dividend that amounts to a 14.0% annual yield. Also, the company repurchased 11.9 million shares during Q3 for $263 million at an average price of $22.16.
American Capital Mortgage declared a $0.70 per share dividend that amounts to a 13.8% annual yield. Also, the company repurchased 3.2 million shares during Q3 for $62.1 million at an average price of $19.60. The acquired shares amounted to an astonishing 6% of shares outstanding at the beginning of the quarter.
Not only does a disconnect exist between the asset manager and the assets managed, but all three companies are showing extreme confidence in the future of these REITs that invest in mortgage-related investments. All three companies are investing in the concept of investing in mortgages, yet the market is trading all three at below current NAVs. Clearly, the only reason to buy shares at this level is the expectation to maintain and grow the payouts from these levels, but the market expects dramatic cuts to justify the current stock price.
Price To Book Value
The below chart highlights what appears to be a never ending discount to book value for American Capital stock. The mortgage REITs have recently been hit and now trade below listed book value. See the chart below:
ACAS Price / Book Value data by YCharts
American Capital remains a unique stock that can afford massive buybacks, yet it trades at a substantial discount to book value. The stock offers one of the more bizarre situations where it can consistently buy $1.30 worth of assets for $1. Not to mention, the company values substantial assets such as the European Capital subsidiary at a substantial discount to NAV. Sure rising interest rates are a risk to the "golden goose" of American Capital Asset Management, but if anything that fear should insinuate more risk in the mREITs and a higher relative valuation for American Capital. The stock should continue to be bought to take advantage of the massive discount.