American Capital (ACAS) made a big change in its approach to its shareholders last week. The company announced the intention, on a quarterly basis, to devote a portion of net operating income to either stock buybacks or dividends. In fact, ACAS revealed the stock repurchase program had already begun with 9.1 million shares already brought back into the fold at a cost of $75mn and at an average cost much below NAV.
The press release made clear that ACAS intended to buy quite a few more shares through next year. We are impressed by the amounts involved to date and the potential totals, which suggest ACAS is serious about this approach. A number of BDCs over the years have announced stock repurchase programs, but rarely have they amounted to much. It tends not to work with the BDC model , which is already set-up for shareholder gratification through dividend payments. However, ACAS is not paying a dividend and so has more latitude.
Our Two Cents: There was a palpable sigh of disappointment from the audience on the last Conference Call when ACAS management indicated dividends would not be resumed any time soon because the company has a surfeit of losses. In fact, ACAS compounded the situation by announcing on that conference call its intention to (temporarily?) abandon its Registered Investment Company status for tax purposes and become a C Corp in the eyes of the IRS. That will allow the company to offset future income against its many losses , whereas as a RIC those losses would expire unused. It was a sensible business decision but unpopular with many investors ( but not all) who were counting on a renewal of the dividend , both to get their hands on the income and with the hope that the resumption would help narrow the gap between the ACAS stock price and its NAV.
Since that conference call, the stock price has been going lower, and the delay in becoming a dividend paying company again may have something to do with that. However Sunday’s announcement appears to have re-energized the ACAS bulls with the stock price jumping appreciably on the news. We will have to see if the promise of a more activist approach on the stock price will result in any lasting increase and promote any narrowing of the price-NAV gap. Unfortunately, the disruptions in the global financial market since the June results will probably also contribute to the narrowing of the the gap by dropping the market value of the assets on the company’s books. Still, we are impressed by the new ACAS approach because the do nothing strategy of the past several quarters was clearly not being warmly embraced by Mr Market.