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American Capital Gains on Share Buyback

Zacks Equity Research

Shares of American Capital Ltd. (ACAS) appreciated 3.38% since it announced the repurchase of its common stock worth $175.5 million on Thursday. Generally, companies conduct buyback programs more aggressively during market pullbacks, to benefit from the discount on shares. This in turn supports the price of the stock and grants security for long-term investors during bad times.

The company repurchased a total of 13.4 million shares of its common stock at an average price of $13.11 per share. Number of shares repurchased represent 4.6% of the company's outstanding shares of common stock as of Jun 30, 2013.

Since the initiation of the new capital deployment program in Sep 2011, American Capital repurchased 83.8 million shares of its common stock for $923.9 million, including the current buyback. The average purchase price came in at $11.02 per share.

As of Jun 30, 2013, share repurchases improved the company's net asset value (NAV) per share by $1.40, bringing the total to $19.28. However, in the absence of this share buyback activity, American Capital would have been required to earn an additional $405 million during the past eight quarters since Jun 2011 in order to record the current level of NAV per share.

The company is progressing with its capital deployment policy based on the repurchase program it has adopted. According to the plan, American Capital puts aside a certain amount for either 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 quarter.

Further, since the beginning of 2012, cash and cash equivalents in hand, cumulative repurchases or dividends, debt position, investment plans and operational issues also help determine the quarterly amount. Lastly, 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 strategy, if the price of American Capital's common stock trade is at a discount to the net asset value of shares, the company will opt for a share repurchase. On the other hand, if the price trades at a premium, the company will prefer dividend payments.

The authorization of the new share buyback program and resumption of dividend payments raise our hopes for an enhanced investor confidence in the company. During second-quarter 2013, American Capital’s asset coverage ratio improved substantially to 1,009% from 956% in the prior quarter.

Alongside, the company repaid securitized debt of $49 million and increased investments by $50 million while strengthening its balance sheet. Moreover, the company recorded $150 million of cash proceeds from realizations of portfolio investments during the quarter.

American Capital’s successful debt restructuring furnished it with sufficient operating flexibility. In addition, the company continues to de-risk its balance sheet through a number of initiatives including repayment of debt.

Moreover, these steps augment the company’s capital position and reduce interest expenses. Though the improved portfolio performance is expected to continue with the economic recovery, we believe the low interest-rate environment and global cues might act as headwinds in the upcoming quarters.

American Capital currently carries a Zacks Rank #3 (Hold). Some companies in the same sector that are worth considering include Hercules Technology Growth Capital, Inc. (HTGC), MCG Capital Corp. (MCGC) and Medallion Financial Corp. (TAXI). All these three carry a Zacks Rank #2 (Buy).

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