On Monday, American Capital Ltd. (ACAS) announced the buyback of its common stock worth $48.1 million in open market in the first quarter of 2012. The company repurchased a total of 5.5 million shares of its common stock at an average price of $8.79 per share. The number of shares repurchased represents 1.7% of the company's outstanding shares of common stock as of December 31, 2011.
Since August 2011, American Capital has repurchased 23 million shares of its common stock for $181.9 million including the current buyback. The average purchase price came at $7.89 per share.
As of December 31, 2011, share repurchases improved the company's net asset value per share by 32 cents. American Capital foresees additional stock repurchases or dividend payments by the end of this year.
Based on a number of factors, the company adopted a new program in September 2011. According to the plan, American Capital keeps asidecertain amount either for stock repurchases or dividend payments, on a quarterly basis. The quarterly amount depends on the company’s cumulative net cash from operating activities in the prior quarters.
Further, cash and cash equivalents in hand, cumulative repurchases or dividends, debt position, investment plans and operational issues are also the determining factors of the quarterly amount. Last but not least, the current trading price of American Capital's common stock, its financial liquidity and the ongoing economic conditions are also taken into consideration.
As per the company’s plan, if the price of American Capital's common stock trade at a discount to the net asset value of shares, the company will opt for share repurchase. On the other hand, if the price trade at a premium, the company will decide on dividend payments.
The authorization of the new share buyback program and resumption of dividend payments raise our hopes for an enhanced investor confidence on the company. During 2011, American Capital had $1.1 billion of liquidity in portfolio at valuations that were on average 3.6% greater than the prior quarter's valuation, which strengthens the balance sheet.
The company also paid off $1.0 billion of debt. Moreover, the company achieved asset coverage of 465% at the end of 2011, well ahead of the minimum requirement of 200% for a Business Development Company.
American Capital’s successful restructuring of debt provided it with sufficient operating flexibility. In addition, the company continues to derisk its balance sheet through a number of initiatives including repayment of debt. However, the unstable economy and interest rates fluctuations could limit the profitability and deteriorate the company’s strategic position in its sector.
American Capital currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. However, one of its peers, Ares Capital Corporation (ARCC) retains a Zacks #2 Rank (a short-term Buy rating).
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