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American Capital, Ltd. Message Board

  • royjm1940 Jun 26, 2013 5:57 PM Flag

    Buy back vs Dividend?

    I understand the Company will continue to buy stock and not pay a dividend as long as the stock price is less than the NAV. This looks like a smart play since the current stock price is over 30% less than NAV and if the Company had used the buy back funds to pay a dividend, they could have paid about $0.42 per share with a annual yield of about 13%.

    I see this as very good news. It looks like we can look forward to a dividend of greater than 13% annually at some time in the future. As a dividend buyer, I would be very happy with such a dividend.

    My question is, will the stock price ever come close to NAV without any dividend?

    SortNewest  |  Oldest  |  Most Replied Expand all replies
    • My views on the matter:

      1. ACAS will not go back to being a Regulated Investment Company until their tax loss carryovers are used up, which could take a couple more years, depending on portfolio sales.

      2. ACAS is not likely going to pay a dividend until the market price is close to book value (say within 10-15% of book or less). They feel stock buybacks are a better use of their cash then paying dividends while the discount is high. However, the market forces are not likely to push up the stock price up to close to book value until a dividend is imminent. This could take several years.

      3. ACAS is likely going to buy back stock each quarter until they get close to a total buy back (all years) of close to 50% of the outstanding stock, which is the maximum allowed by law (I think they are at around 20% so far).

      4. ACAS has plenty of cash to both buy back stock and make new investments. Further, they have a significant amount of credit available. They are not making many new investments right now because there are not many deals out there that meet their potential return criteria. They will use credit to do deals in the future, but they will not come close to leveraging the balance sheet as much as they did in 2007-8. They won't take that risk again (they learned their lesson last time). Stock buybacks are not significantly influencing their decisions regarding new investments for their portfolio.

      5. Book value should increase each quarter as long as we don't have a recession whereby their portfolio values would/could decline significantly. The stock price should follow the book value upward. Investors who want cash from this company should sell off small pieces of their ACAS holdings each quarter (hopefully at long term capital gains rates) in order to simulate a dividend with better tax results.

      6. Whenever the discount to book in the market is 30% or higher, investors should be buying this company, not selling shares.

      Sentiment: Strong Buy

      • 2 Replies to ribi1
      • Hi ribi, thanks so much for your always helpful analyses. I have two further concerns to which I was hoping you might respond.

        First, can the restructuring that is coming proceed before all of the tax losses are used? That is, would it be possible to spin off one part of the company without tax losses so that the spun-off part could begin paying dividends while the other part retains and continues to use the tax losses that have been carried forward?

        Second, at recent prices the discount from book value has been exceptional. I had thought that the company had the flexibility to buy back many more shares under such circumstances (and thus I was disappointed that they did not do so at the end of the last quarter), even if it meant "borrowing" from planned buybacks later in the year. Why do you think the company failed to buy back many more shares last quarter?

        I would be grateful for any insight you--or NMB or others--might be able to provide on these questions.

        Sentiment: Strong Buy

      • Ribi tell'em, tell'em, tell'em.

    • I think not alone with buying back shares they ARE NOT investing in companies.That is a very bad sign.Where are the new investment companies coming from? Answer nowhere their not investing!!

      Sentiment: Strong Sell

    • if they had waited just a little longer they could had bought many more shares with the same amount of money. i think they have spent enough money on the program b/cause the makert makers has given them the opportunity to go so. now they should declare dividends to make the stock's price increase and bring it up close to nav

    • I'd like to see 50% in buyback and 50% in dividend

    • As long as ACAS makes money and has the cash to keep buying back stock--which will increase the NAV/remaining share, we as remaining shareholders we will make more money as the share price will continue to chase higher the ever increasing NAV per remaining share. A very positive way to make long term capital gains without paying taxes on dividends as you increase wealth over time.


      • 1 Reply to buyandwin
      • I am with you. Capital gains only are taken when you sell and taxes are quarterly on the interest you earn, long term holders are winning. I think this plan goes a long way to restore the fortunes of real long holders of ACAS who ACAS hurt in the past. I am not unhappy with ACAS. I wish the market was not becoming so Cramerish and saying buy-buy-buy or sell-sell-sell like bobble-heads, that is a loser way to invest and dangerous for people who are not thinking through their trades.

        Sentiment: Buy

    • It's a bittersweet situation. On the one hand the buyback increases NAV some in of itself. On the other hand the SP would probably be at NAV or higher with your suggested dividend scenario. Before the recent sell-off the closest the SP has reached NAV was around a 27% Discount to it. Right now it's about a 37% Discount. I personally don't think it will come close to NAV because most people are in BDC's for the high dividends.

    • I think your best bet is to wait until the Deferred Tax Asset is depleted. Then the question is will the Company seek RIC status and start paying dividends or will it pay Uncle Sam his due and buy back shares with whatever is left.

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