Friday morning, I attended the annual shareholder meeting for American Capital (ACAS). The presentation revolved around the year-end results, for the fiscal year ending December 31, 2011 (so that there is no confusion). I will say that my own thoughts are loudly echoed in various articles and posts on Seeking Alpha - particularly in the detailed and on-point analysis by Jaded Consumer. I want to touch on a few topics discussed at the meeting which have bearing for future NAV growth, dividend potential, and thereby share price.
Changes to Corporate Form
Although the question was not specifically asked, American Capital's management alluded to the idea that returning to RIC status after consuming all of the Net Operating Loss (NOL) carry-forwards is not a certainty. This raises the blood pressure of those who salivate for reinstatement of a mandatory dividend. Although ACAS can elect to pay a dividend as a C-Corp, if they return to RIC status they must distribute a minimum of 90% of income in the form of a dividend in order to avoid tax at the corporate level. So corporate tax liability on those dividends becomes an issue, if they are reinstated while a C-corp. But as management was unclear on their intentions for future corporate form, it remains an issue for a few years down the road.
In the near term, remaining a C-corp. is a well-documented benefit to shareholders due to the current share buy-back at discounted prices with respect to NAV (see Jaded Consumer's article). This near-term effect is a large factor in why American Capital is seen as such a good buy while trading at a significant discount to NAV. The share buy-back program is accretive to EPS which will boost NAV; combine this logic with the fact that American Capital has traded historically at 1.3:1 premium to NAV (approximately), there is plenty of room for share prices to rise even more quickly than NAV.
I had the opportunity to ask about management's sentiment toward consolidating European Capital (ECAS) onto the ACAS balance sheet. In their presentation, they mentioned the double-discount of ECAS on American Capital's books, citing it as a "$267MM discount to ECAS NAV" (available here). Management informed me that a few years back they sought out the idea of consolidating European Capital into American Capital. However, FASB standards did not allow for this to occur at the time that American Capital wanted to consolidate. Those same rules are subject to change by the SEC and have just passed the comment period; they are awaiting the results. Bottom Line: management said that they would be happy to consolidate ECAS into their books - if the rules are changed - and only deal with the single NAV discount based on fair-value of assets in Europe. This would be an instantaneous jump in NAV, which they all seemed excited to realize.
Net Operating Loss Carry-Forward
The tax benefit so widely known by American Capital shareholders - some $1.2 Billion - still has a long life and is well documented in earlier articles. To add value, I wanted to give an update of when the tax benefit will run out. The management team clearly seemed committed to taking full advantage of this accrued benefit to offset taxable income. They were clearly excited that they were able to change corporate status to gain full benefit of the tax losses previously incurred - but they are realistic it will take a while before the tax benefit is fully used up. Their exact words were that it would last "for a while." I understand they cannot give a concrete projection as of yet due to the dynamics of the economy and its effect on their corporate performance and rate of profitability. But the consensus among corporate executives was that it should last for 2-3 more years, and is clearly dependent on American Capital's ability to bring in a lot of income (which again, we were overwhelmingly assured would occur).
American Capital's management team seems sharp and has proved themselves by completing the difficult task of steering the company through a tough recession and difficult financial crisis. They have found a great revenue generator in the asset-management business to offset the decline (I think temporary) in profit from their equity business. They did not disappoint today with their explanation of various decisions which affect shareholders. Based on the meeting, it reinforced my belief that NAV will be rising quite nicely over the next few years, and in all likelihood the share price should return to its traditional premium to NAV as investors get comfortable with management's actions and execution of their plan. I hope my notes from Friday's meeting were helpful.
Disclosure: I am long ACAS.