American Capital Strategies: Dividend Analysis

May.16.08 | About: American Capital (ACAS)

American Capital Strategies, Ltd. (NASDAQ: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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