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American Capital, Ltd. Message Board

  • icon0 icon0 Oct 24, 2013 11:22 AM Flag

    AGNC and MTGE Buybacks


    In Q3, AGNC bought 11.9M shares. I understand this policy is part of a 500M repurchase plan. My concern is that this will reduce equity capital, Management fees and ACAM valuation. A similar smaller policy is in play at MTGE, 3.2M shares in Q3. These shares are intended to be purchased below NAV. So far, AGNC has spent 347M on stock. This policy was announced in Q3 of last year, but hasn't really gained steam till this latest announcement. Was the buyback plan accounted for in Q2's markdown of ACAM or will there be subsequent markdowns as revenue from the mgmt business decline?

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    • Share buybacks are more common with m-REITS than they are with closed-ended funds and bdc's like ACAS.

      The reason is that m-REITS are more in the business of "working the assets", whereas other entities focus more on optimizing business operations and the performance of investment capital.

      Some would say that ACAS should focus more on the performance of it's operating companies and the buying and harvesting of them, rather than share buybacks... but ACAS stock has been selling at such a substantial discount to NAV that it's quite arguable that the better ROI comes from buy the company's own stock.

      I also think that ACAS management is so in tune with the practice of buying and selling m-REIT stock at discounts and premiums respectively, that they are much more granular with such practices with ACAS as well... especially since ACAS looks more like a close-end fund than MOST BDC's

      I concur with their strategy, but I lament that they havn't been as good as their BDC competition in managing their assets and portfolios, which is a big part of why the company sells at such a discount.

      I'm still a holder of ACAS stock, but have not been a buyer since it went over $14. I've been anticipating a market pullback since my friend, Don Hay's psychology index went to "P6" (bearish near term), and I suspect that ACAS has at least one more disappointing quarter left in them before some of their most recent operational paradigm shifts takes hold and begins to impact results.

      Still, gotta admire the climb to $16... I wonder who the big seller was 15 minutes ago, however.


    • I am not certain of the accounting treatment of the buybacks and their short-term impact on the payments due ACAS. However, the best long-term result for ACAS lies in the improvement in cash flow and dividends for AGNC and MTGE. When the price of those two stocks exceeds their book values, ACAS can issue new shares, benefitting the shareholders of all three companies. The stock price of AGNC and MTGE will improve with improved financial performance (in cash flow and dividend payments per share), and by ACAM demonstrating that it is acting in the best interests of the shareholders. The buybacks contribute, appropriately, to this perception--in addition to raising per share cash flow and, at some point, dividend payments. I believe we are close to or at a floor in quarterly dividends for both AGNC and MTGE, that both companies will be reporting higher book value per share next week, and that the recovery in their share prices will continue (I hold stock in both ACAS and MTGE). Thus, even if the buybacks for MTGE and AGNC have some small-scale short-term impact on ACAS--and I am not sure they do--the long term contribution to ACAS is unambiguously positive.

      Sentiment: Strong Buy

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