American Capital, Ltd. (ACAS)

ACAS is a financial, and has been dumped with financials. It sells below NAV, and has paid an increasing dividend since first publicly traded over a decade ago. It has often traded at a premium to NAV. Management has made clear that it regards dividends as a non-restatable report card on management performance, and clearly intends continuing to pursue its announced dividend schedule. Cumulative dividends are roughly twice the 1997 IPO price of $15, and you can't fake those or reprice them.

ACAS' business is badly misunderstood. Good entertainment isn't the same as good analysis.
http://jadedconsumer.blogspot.com/2008/06/professional-stock-analyst-opinions.html

ACAS occasionally goes "on sale" on the strength of irrelevant news. http://jadedconsumer.blogspot.com/2008/08/irrelevant-news-yields-acas-buy-op.html

Concerns that ACAS might not be able to afford its dividend seem based on confusion between ACAS' taxable income (the driver behind the dividend ACAS must pay to maintain its tax status) and its SEC-reportable income, which includes things like unrealized losses on investments that are paying as predicted and from which ACAS has no intent to exit.
http://jadedconsumer.blogspot.com/2008/08/acas-correction-at-jadedconsumer.html

ACAS' only exposure to home mortgage instruments is its stake in AGNC, a publicly-traded company ACAS launched that pays ACAS a monthly management fee, and was launched this spring after the subprime problem was well-recognized and was not a surprise to ACAS. Now that FRE and FNM have been bailed out by the Treasury, AGNC's entire portfolio is now backed by the full faith and credit of the U.S. government. AGNC dividends and management fees amount to about $0.04/share/quarter that ACAS didn't have before its launch in 1H08, indicating that ACAS' management enjoys opportunities to raise funds for management that don't work against its shareholder interest.
http://jadedconsumer.blogspot.com/2008/09/making-money-old-fashioned-way-with.html

ACAS has a strong record of only raising money through offerings when accretive to shareholder value, rather than diluting it. Management has shown willingness to walk away from deals that don't pass muster rather than doing deals just to make some quarter's numbers. In short, ACAS seems managed in the interest of long-term share holders by a management with a long record of success in the field. I am long ACAS and participate in the DRIP, which allows below-market purchases when the shares trade above NAV, which historically it's often done.

To get the dividend rate in line with historical rates, it would be necessary to double the stock price or halve the dividend; however, the company's liquidity appears adequate to continue paying the dividend and management clearly has no intent to lower it. I think this is a good opportunity to buy a stock that's mispriced. For reasons described in the first link, the stock may be mispriced in more ways that one: the NAV may be an understatement of genuine values, and the stock trades materially below NAV.

I give ACAS the green light.

My method for rating stocks is pretty simple. Since our definition of “The Market” is the S&P 500 Index, I have done an extensive analysis of these companies. I simply did a multiple regression comparing the per share data like dividend, book value, earnings, etc. compared to share price. Then using this regression, I can come up with what the market says a company’s share price should be, based on these fundamentals. But I don’t stop there. There are plenty of stocks either overpriced or under priced based on their prospects for the future. So I did a percentile rank of each of the rest of the fundamentals, like financial strength, management effectiveness, growth, profitability, etc.. I found that, most of the time, a company with a high percentile rank in these safety factors, was trading for more than the per share data says it should be worth. Conversely, companies with low ranks tend to trade below their calculated value. There are a few rare examples of companies that rank highly in safety factors AND trade below calculated value. These are the stocks I want to own. These are my out-perform picks.

This company is the baby that has been thrown out with the bathwater. The stock has been punished severely because it is a "financial," and has had to write down some of its holdings because of the new accounting laws. These write-downs are smoke and mirrors. They have to carry their holdings as "market value," even though there is practically no current market for them and they have no intention of selling now. They will continue to hold them until maturity, and they will continue to perform. One can well expect that these "write downs" will be written back up in future when they do come to maturity. It has been punished along with all the other stocks in the financial sector, yet it is much less leveraged than all the banks, and has virtually no expsoure to residential subprime loans. It has been victimized by naked short sellers and those who just don't understand its business model. Some will now think that the nearly 20% dividend is too good to be true, but this company is extremely well-managed, and made provisions for a recession early in 2007. They have already said that they have enough cash to maintain the current dividend through the end of 2009. I fully expect this to be one of my best picks in CAPS, in spite of its fall since my original pick. In fact, I have since put my money where my mouth is, and am still accumulating shares at the sub-$20 level whenever I can get my hands on some cash.

At this point the near term future of ACAS largely depends upon the ongoing negotiations concerning the breached debt covenants. If ACAS can come to an agreement with their creditors and restructure this debt, I believe that we will see a jump in their stock value and that they will be in a much better position for weathering this storm. Combine that with easing of the Mark to Market regulations and ACAS should have all that it needs to fully recover. Under this scenario, I believe that we will eventually, with long term recovery along with the macro economy, see stock value back to the $30 to $50 range.

If ACAS and their creditors can not come to an agreement, the debt will be accelerated. This could ultimately push ACAS in to Chapter 11 reorganization bankruptcy. This would cause the stock value to crash and equity holders could end up losing all of their money. However, as was stated in the recent earnings call, under a Chapter 11 reorganization it is quite possible that most, if not all, of shareholder value could be preserved as long as ACAS can demonstrate that they can pay their bills and run their business profitably going forward post bankruptcy. I believe that they would be able to prove this to the judge, especially with the easing of the Mark to Market rules. Therefore, in my opinion, full recovery for ACAS would eventually occur, though it would just take a bit longer.

I like an 8% dividend with a history of being raised regularly and a management that states flat-out it won't declare a dividend it thinks it'll ever reduce. It's a hedge against price erosion. Then I look at the capital appreciation happening underneath, and I see dollar signs.

I'd be more worried about the company and whether it can keep up the good work, except for two things. First, I read about the lead executive. His story is interesting, and it reveals something about his values. He's not looking for an easy buck, he's working for smart opportunities. And this leads to the second point: the company was recently punished for "missing" a quarterly prediction. Why? A deal didn't close during the quarter. ACAS' management would rather miss a deal than enter one on the wrong terms. ACAS' investing discipline, while it may drive analysts and traders nuts, should warm the hearts of long-term investors.

ACAS participates in a variety of financing activities, holds senior debt, etc. even for companies for which it doesn't provide one-stop-buyout. ACAS makes money both from these investments and from its portfolio companies. The dividend is paid from ordinary income, and ACAS reinvests its capital gains.

I see ACAS as a long-term growth story which, unlike Berkshire Hathaway or Markel, pays a dividend. Yes, it can't get paid to borrow money like an insurer, but its performance speaks highly for its management's competence in creating capital appreciation while paying income.

Note: ACAS has a DRIP that enables owners to re-invest at 2% below market price. TD Ameritrade participates in the DRIP even though it's not listed on ACAS' list of participating brokers, so your broker may allow you to reinvest at a 2% discount, too. Check it out.

I like investing in people who are smarter than me. ACAS, BAM, BRK-B are all plays on this theme with strong management. Decent yield is included hedges against pure capital gain speculation.

ACAS will do well as a safety pick but more importantly it is a steady grower and a great dividend pick.

June 15th, 2009 payable by Setember 30, 2009, ACAS will be declaring a $300 million dollar dividend in order to meet its RIC requirements. New rules allow the company to pay up to 90% of the dividend in stock. The Company will be announcing how the dividend will be paid out at that time. The directors have also asked the shareholders to approve a reverse stock split, at which point they will sell a limited number of shares to raise cash, which would be used for general purposes and to bring the ACAS to a resolution of it's defaults. The Company believes its NAV per share is $17.07, but due to FAS #157 ACAS's stated NAV it's $12.32, as of March 31, 2009. ACAS feels the stated NAV does not reflect the companies assets if they were to be sold in a more favorable business climate.

In short, ACAS has a plan to correct the perceived share value for it's investors. It seems to be a sound plan. Only time will tell for sure. I personally feel much better about their prospects of remaining a going concern. I would be very conservative with new money until after they announce how the dividend will be paid, and how many shares you will own after the reverse stock split. We can only wait until June 15th to see what the final plan will be. If it satisfies the creditors, it's share price should gain upward momentum rather quickly, as the stock should be valued somewhere between $12 to $17 before the reverse split, (not including dilution from new shares issued). It is currently trading near $3.

Banks & Finacials will out perform with the fed about to pause or cut intrest rates. With a sustainable 9% Div how can you go wrong. This stock is under valued and is weighted the heaviest in my stock profile.

I love it when a stable, well-managed, and growing company temporarily stumbles – those are the times when opportunity starts knocking.

American Capital Strategies recently missed earnings by a hefty amount, but lumpiness in earnings is to be expected from a company that makes its money through investments and may encounter sporadic realized gains, as well as fluctuations in unrealized gains. The earnings miss was attributed primarily to a $47 million write-down in unrealized appreciation of one investment (ASABiofuels, an ethanol production company), which remains a profitable investment despite this reduction.

ACAS was founded in 1986, became publicly traded in 1997, and is still run by its founding CEO, Malon Wilkus (55 years young). It is structured as a regulated investment company (RIC), and as such, is required to distribute at least 90% of its taxable income as dividends. Its investments range across many industries (from internet publishing to apparel to chemical manufacturers), and typically take the form of direct investments, entire buyouts, or mezzanine financing.

Management does seem to have a good nose for value, as the internal rate of return on all investments has been 16.5% since 1997 and 19.2% since 2002. Returns on equity investments have been even higher, at about 30% IRR. For the company as a whole, return on assets stands at 6% and ROE at 22%. Dividends have been increased regularly, with the latest a hike of 11%. Dividend yield currently stands at about 7.8%. Total return to shareholders has been about 22% annually since the IPO. In addition to these laudable performance metrics, management tends to present a lot of information with their releases, and appear to be very share-holder friendly.

Using a discount rate of 11.3%, and if you assume that this year’s anticipated dividend ($3.68) can grow for a mere 3% in perpetuity, the shares would be worth about $47 on that basis alone. My fuller valuation model on an earnings basis yields a valuation ranging from $48 with my most pessimistic assumptions (using lowered projections of $3.26 in earnings, 9% initial growth falling to 5% over 10 years, no growth thereafter), up to $60 with somewhat more optimistic assumptions. I think reality will turn out to be toward the optimistic end of the spectrum. At a recent price of $45.80, ACAS is trading at 1.28 – 1.40 times management’s projected 2007 net asset value (which ranges from $32.90 to $35.90). It currently trades at 1.5 times NAV.

For a list of investments, including business descriptions, type of investment, and the amount invested by ACAS:
http://www.americancapital.com/our_portfolio/our_portfolio.html

Investors interested in ACAS would be well-served to review this TMF article by Stephen Ellis:
http://www.fool.com/investing/general/2006/11/01/american-capital-an-investing-gorilla.aspx

With a long term total return of almost 20 percent (since the 1997 IPO), and a cash dividend of almost 10 percent, this is long term winner. The staff is really good at selecting companies with whom to do business - and getting stock, warrents, and options in these companies - as well as making profitable loans.

Well run and beaten up

I should have included ACAS with my initial picks instead of waiting until it enjoyed such a large uptick. I have been holding it for quite awhile (some I bought at $20, some I bought at $3) because I do have confidence in it. They hae been around quite awhile and have a great track record. And, as credit begins to again flow toward riskier investments, the company should enjoy a solid increase in NAV which will remove concerns over leverage restrictions and convenants and should weaken the position of those slimey blood-sucking lawyers (don't they know they are doing more to hurt shareholders than management has ever done? -do they care?). Furthermore, sometime in the coming months, whoever is holding the stock will get a nice check for around $1.50 per share (last years gains) and, I shouldn't be too surprised if they don't resume making some quarterly payments. Perhaps it is these elements which moved the market so strongly today, I didn't see any specific news.

The pending litigation makes this a risky play (based on past experiences), but the upside is good.

ACAS has a high return on invested capital which will weather any interest rate increases. Also the dividend is secure.

The directors started buying up stock once it got below $7. Once it fell below $4 they started buying like there was no tommorrow. It's at 2.53, I'm going to follow the insiders, but cheaper.

Share price has been driven lower due to the sell offs in the market as a result of the recession we're experiencing. Once the US economy and markets bounce back, the share price will soar, as will their profits.

ACAS has paid dividends and increased them for the past 10 years.

This stock is on sale right now, load up while you can.

American Capital Strategies is a Business Development Company or BDC, "...with nearly tax-free status and the goal of increasing public funding for small-and middle-market companies." In addition, "BDCs have beaten the S&P 500 by 14 percentage points over the past five years, according to FactSet." (Motley Fool Income Investor 1-07) That all sounded great. Then I read, ACAS is a "loan shark" for businesses that need financial assistance. Hmmm. But it also "...invests in and sponsors management and employee buyouts," per Google and that appealed to my communal/cooperative side. Either way, I purchased American Capital Strategies on 1-5-07 at $46.32, a little above the $45 buy-around I remembered seeing beforehand. (It's at $47.98 this hour.)

Following Anticitrade. American Capital's stock is on fire sale at less than 25% of book value. Book value has been significantly marked down to reflect current market conditions. Although this company is currently in default on its loan obligations, its lenders gain nothing by foreclosing.

American Capital provides nice capital gains plus a large dividend. Provides participation in the non-publicly-traded end of the market. ACAS has a very interesting portfolio. Great for a Roth!