American Capital, Ltd. (ACAS) offers a compelling valuation based upon its discount to net asset value (NAV). The company, per its August 1st conference call, gave an upbeat presentation on their dividend goals and focus. The company decides, based upon share price to NAV, to pay a cash dividend or purchase back stock. In recent quarters, the deep value to NAV has encouraged American Capital to buy back stock.
Investors have an opportunity to purchase American Capital shares at $10 per share when the book value is $16.62 per share. This is a 40% discount to NAV. Management has stated a cash dividend will be paid when the stock price and book value per share narrows. In this article I will highlight 4 positive catalysts to move the company's share price and net asset value to narrow.
American Capital is a C Corporation. The company was previously a Business Development Corporation (BDC). The company changed to a C Corporation to take advantage of its mounting net operating losses. The 2008-2009 financial crisis hit the over leveraged American Capital. Examine the below American Capital price chart:
In my opinion, this is incompetence on American Capital's management. They over levered their balance sheet. There are zero excuses to lose 95% of the share price. They planned for a perfect world, and a perfect world didn't exist in 2008-2009.
Management has not changed as founder Mr. Malon Wilkus is still in charge. He has, I would propose, deleveraged the balance sheet and taken positive steps. He should take full blame for the incredible losses many shareholders experienced during the lean years. I am looking at American Capital based upon August 2012 valuations.
Main Street Capital Corporation (MAIN) and Triangle Capital Corporation (TCAP) are two companies focused upon maintaining shareholder value and paying out consistent dividends. Both are BDC's focusing upon investing in senior debt, preferred stock, equity, and mezzanine loans.
As the above and below chart shows, both Main Street and Triangle Capital have thrived in the past few years. American Capital is yet to pay a cash dividend.
American Capital invests in buyouts, growth acquisitions, and recapitalization opportunities. American Capital provides one stop buyout services. These funding opportunities include the acquisition of senior debt, mezzanine funding and equity.
1) Share Repurchase Program
American Capital purchased 9.1 million shares during the 2nd quarter at a cost of $9.34 per share. Over the past 4 quarters, American Capital has repurchased 9% of its shares. This has resulted in a net 65 cent net asset value accretion. American Capital trades at a 40% discount to current portfolio holdings.
Management has stated a cash dividend will be issued if the gap between common stock and net asset value narrows.
2) Tax Benefits
The company can't convert to a Registered Investment Company (RIC) status for tax purposes. American Capital would lose Internal Revenue Service (IRS) tax benefits on its net operating losses. Thus, American Capital remains a C Corp in the eyes of the IRS and shareholders. Shareholders want a cash dividend.
3) Equity Investments: American Capital, LLC
American Capital, LLC, is the fund management portfolio company of American Capital, Ltd. American Capital, Ltd. collects a 1.25% annual percentage of American Capital Agency (AGNC) equity. American Capital, Ltd. collects a 1.5% annual percentage of American Capital Mortgage (MTGE) equity.
American Capital owns $2.4 billion worth of equity assets. The focus is to maximize shareholder value on these positions. American Capital, LLC, is raising new funds for additional investments. On the August 1st conference call, management did not state what sectors new monies were employed in.
The company has aggressively deleveraged over the past 3 years. Management is focusing upon increasing the volume and quality of 3rd party debt and mezzanine offerings.
American Capital, LLC - a private entity - receives compensation in $90 billion. These investments include funding American Capital Agency Corp. and American Capital Mortgage Corp. .
American Capital, Ltd. is a turnaround story. I wish management changes were made at the top. Mr. Malon Wilkus deserves all the blame for almost bankrupting the company in 1998-1999. Life moves on. I recommend the shares as a turnaround story. I believe interest rates will remain low for a multi year period based upon global deleveraging. This will support the company's investments in American Capital Agency Corp. and American Capital Mortgage Corp.
I do focus upon risk management and Mr. Wilkus lacked due diligence to employ risk management on the American Capital balance sheet during the lean years. This is a position dedicated to a turnaround story and a continued low interest rate environment. Gary Kain, CEO of American Capital Agency, has provided a winning hand to Mr. Wilkus and the American Capital stock price. The mortgage real estate investment trust performance continues to impress investors and income seekers.