I agree. Further, I would much rather have the stock buybacks than dividends. I realize a dividend might bump the stock in the short term, but in the long run, I prefer them making an immediate risk free, double digit yield on every buyback. It beats increasing the book value per share by taking a large risk with a small company, then waiting years to get the same effect. Management will continue to do buybacks for as long as it takes to bring the stock close to book. And with their strong balance sheet, they will have the ability to do buybacks for the foreseable future, probably generating 20 to 30 cents a quarter (without risk or tax).
ACAS has been rolling in cash for a while now. They have used their cash to retire debt in order to reduce their interest cost and obviously to buy back stock. They have not made many new investments so, until they do, why not use cash (which earns virtually zero interest income) to buy back stock rather than using up their debt issuing opportunities, which would cost them more interest? I think they will take on more debt when either they ramp up their new investments or their cash reserve gets too low (which is not likely in the near term).
I think they are not making many new investments because, in part, they cannot find investments that provide the same rate of return they are getting from stock buybacks, and the stock buybacks are risk free. As long as the discount stays above 25-30%, it will be their first choice for the use of their cash, subject of course to the limitations on buybacks under the law. After all, why take a big risk in the hope of making the same money that can be made instantly on a stock buyback? There is a limit to this strategy because stock buybacks shrink the balance sheet, but they are a long way from that limitation affecting their decisions.
I was not trying to estimate the 9/30 book value, just the accretion per share on the buyback discount. I subtracted the cash from the starting book value because that cash is gone from the balance sheet and the shares purchased I assume are retired each quarter.
Check my math on this. All amts as of 6/30. 289.4 million shares outstanding, minus 13.4 million shares purchased and retired this quarter = roughly 276 million shares o/s after buybacks (ignores stock options). BV at 6/30 was 5.579 billion less 176 million spent on shares equals revised BV of 5.403 billion. Revised book value of 5.403 billion divided by revised shares outstanding of 276 million = new BV per share of $19.57 or a $.29 per share increase. I realize this is not exact but it appears that the accretion is in the neighborhood of $.29. Thoughts frontline?
I am a heavy investor in ACAS for a number or reasons. I understand your point of view, but I don't view ACAS right now as a "growth" investment, I view it as a "value" investment.
Some considerations are 1. The discount to book is too high all factors considered including the likely future of the company. 2. The are likely to reorganize the company, which will likely recover a substantial portion of the current discount to book. 3. The discount to book provides a much greater protection on the downside than other BDCs that currently trade at or above book. 4. The return from ACAS since the great recession and the return for the next year or two will come from book value growth (which is likely), which for me will be taxed at long term capital gains rates when I sell. 5. The balance sheet is incredibly strong with very little debt, which is another safety factor on the downside. 6. The true book value if you eliminate the required discounts (for accounting purposes) related to their European operation and their debt investments is well over $20 per share as of June 30. 7. The next recession does not appear to be right around the corner, but a ways off. 8. Current tax rates for higher bracket taxpayers (this affects me) severely penalize non-qualified dividends from BDCs making a growth oriented BDC like ACAS much more attractive than other BDCs. 9. While management made a hugh mistake by being overleveraged 5 years ago, I view them as being very competent and shrewd.
Basically, I like the notion of buying a company with a strong balance sheet, positive earnings, and a price that is less than 70% of their asset values. Further, given the volatility of this stock, this is a day traders dream. I have made tons of $ buying when it dips and selling when it recovers, which it seems to do several times a year. ACAS has the two characteristics needed for successful day trading, high volatility and strong fundamental values
If you plan to own ACAS for the long term, the discount to book has a hidden value that not everyone recognizes. The company will continue to buy back stock as long as the discount stays high, and will do so until they reach the maximum buybacks allowed by law, which wont be for several more years. The benefit is an immediate profit impact on book value per share approximately equal to the discount. So if the discount is 32% today, the impact on book value per share of a share buyback is equivalent to a 32% return on an outside investment, but without the risk of that investment (and without tax on the profit). And in today's market, investment opportunities for BDCs with that kind of expected internal rate of return are very hard to find. If they do find one, it is very high risk. So, long term investors should just sit back and benefit every quarter from the 30%+ return from that quarters buybacks.