American Capital Strategies: Dividend Analysis

American Capital Strategies, Ltd. (ACAS) is a principal investment firm specializing in management and employee private equity buyouts, acquisitions, recapitalizations, mergers and acquisition, add-on acquisitions, securitizations, special situations, growth capital investments in middle market companies, early stage in mature private and public companies, corporate divestitures, acquisitions of portfolio companies of private equity firms, acquisitions of family-owned or closely held businesses, change of control, or the exit of minority shareholders, going private transactions, and ownership transitions.

American Capital Strategies is not a dividend aristocrat but is a component in S&P 500 index. It has been increasing its dividends for the past 10 consecutive years however, while delivering an impressive average total return of 19.50 % annually to its loyal shareholders.

At the same time the company has managed to deliver a notable 11.60 % average annual increase in its EPS since 1998. If we look at the earnings chart though, it looks as if the EPS has been range bound, never been able to exceed $7.

The trend in ROE has followed the trend in EPS closely over the past decade, rising as high as 31% in 1999 and falling as low as a negative 1% in 2000. The average return on equity has remained at 11.30%. Annual dividend payments have increased over the past 10 years by an average of 9.80% annually, which is slightly below the growth in EPS. A 10% growth in dividends translates into the dividend payment doubling every 7 years. If we look at historical data, going as far back as 1998, ACAS has indeed managed to double its quarterly dividend payments every four and a half years on average. If we invested $100,000 in ACAS on December 31, 1997 we would have bought 6906 shares. Your first quarterly check would have been $1,726.50 in March 1998. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend payment would have risen to $17,095 by December 2007. For a period of 10 years, the quarterly dividend has increased by 300 %. If you reinvested it though, your quarterly dividend income would have increased by 890%.
The dividend payout has fluctuated greatly, along with the EPS and ROE. The current ratio of 94% does look a little high. When put into the perspective of the past 5 year’s average of 88% though, it looks pretty normal for the company. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. I think that ACAS is attractively valued with its low price/earnings multiple and above average dividend yield. ACAS is every dividend investors dream stock with its above average dividend yield and dividend growth rate. It should be part of every dividend investor’s portfolio.

Disclosure: I own shares of ACAS

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Comments

[gordo]

Thats a fair article, I would add that this is a very competent management team and they are developing a more fee based business model also they are being unjustly prosecuted currently in that they have little exposure to mortgages - primarily they invest in private companies across senior, mezzanine, and equity capitalizations....

[Chicago Mike]

Hi Dobromir,

Very informative analysis! I also bought these shares in January when I saw that it was yielding around 11%, and S&P ranked it a Strong Buy (5 stars). I will admit I did little analysis beyond reading S&P's review of the company, so I keep waiting for the bad news. Usually when the story sounds too good to be true, it is! Last time I bought a stock with a nice yield (Bank One was yielding 5%), they cut the dividend shortly thereafter! It looks like this investment firm has been able to consistently bring in profitable investments. What do you see as the biggest risk to watch out for with this stock?

Mike

[chazblod]

Ira Wagner and his team know their stuff...when it comes to mezzenine financing and running a high-dividend company, the management team's ability to plan and execute and adapt to an ever-changing environment is critically important. As an investor, your highest risk in the long-term is either a change in management, or a major and expensive business endeavor going south. High-yield companies like ACAS have to issue new stock whenever they invest in a major new business endeavor like branching into Europe, so your shares will get diluted from time to time...don't get nervous, though, as long as the management team remains in place because they know what they're doing and they don't issue new shares lightly...

[TKTK53]

19.50% RETURN ON YOUR MONEY
HOW MANY PLACES DO YOU KNOW THAT YOU CAN GET THIS YEAR OVER YEAR. AND LOOK AT THE PRICE RIGHT NOW - PRETTY GOOD INVESTMENT. CHECK OUT IT'S 52 WEEK HIGH AND LOW
TKTK53

[Whisper OnThe Wind]

Chicago Mike, if you had held onto your Bank One, you would have JPM now, which doesn't have the nice dividend yield, but it has been able to weather this crunch a little easier than the rest. ACAS is one I like also, better than JPM, but not so much that I would dump all my JPM... just some. I like the security JPM gives me.

[ajhough]

I have owned ACAS for many years and have read at various times how it just can't doing business like it is. I bought it after my broker recommended me not to buy it. He was wrong and I was right.

[Roland]

Focuses too much on the past and not enough on the future.

[jcbyte]

I have made a low of money and this stock and plan on purchasing more at this low price. I would advise always reinvesting dividends and use then sell when cash is needed.

JC