On Friday, American Capital Ltd.(ACAS) announced the buyback of its $58.7 million common stock in open market since early November. The company repurchased total 8.4 million shares of its common stock at an average price of $6.97 per share.
During the third quarter of 2011, American Capital repurchased a total of 9.1 million shares of its common stock in the open market for $75 million. The average purchase price was $8.21 per share.
American Capital foresees additional stock repurchases or dividend payments by the end of December 2012.
Based on a number of factors, the company has adopted a new program in September 2011. According to the plan, American Capital will keep aside some amount either for quarterly stock repurchases or dividend payments. The quarterly amount will depend on the company’s net cash from operating activities in the prior quarter. Further, cash and cash equivalents in hand, debt position, investment plans and operational issues will also be the determining factors for the quarterly activity. Last but not the least, the trading price of the company’s common stock, financial liquidity and ongoing economic conditions will also be considered.
According to this plan, if American Capital’s common stock trade at a discount to the net asset value, the company will opt for share repurchase. On the other hand, if the stock trades at a premium to the net asset value, the company will opt for dividend payments.
The authorization of the new share buyback program and resumption of dividend payments raise our hopes for enhanced investor confidence in the company.
Earnings Recap
American Capital’s third-quarter 2011 operating income of 19 cents per share fell below the Zacks Consensus Estimate by a penny. However, the results outpaced the prior-year quarter’s earnings by 2 cents per share. The favorable result was due to a drop in operating expenses, partially offset by a decline in interest and dividend income.
American Capital’s successful restructuring of debt provided it with sufficient operating flexibility. Further, the company continues to derisk its balance sheet through a number of initiatives including repayment of debt. However, we believe limited accessibility to capital and increased funding costs have weakened the company’s strategic position in its sector. Moreover, the improved credit quality of the portfolio is expected to continue along with the economic recovery.
American Capital currently retains its Zacks #3 rank, which translates into a short-term ‘Hold’ rating. Moreover, considering the fundamentals, we are maintaining our long-term ‘Neutral’ recommendation on the stock. Among American Capital’s peers, Ares Capital Corporation (ARCC) retains a Zacks #2 rank (a short-term ‘Buy’ rating).
