Friday, May 16, 2008

American Capital Strategies (ACAS) Dividend Analysis

American Capital Strategies, Ltd. is a principal investment firm specializing in management and employee private equity buyouts, acquisitions, recapitalizations, mergers and acquisition, add-on acquisitions, securitizations, special situations, growth capital investments in middle market companies, early stage in mature private and public companies, corporate divestitures, acquisitions of portfolio companies of private equity firms, acquisitions of family-owned or closely held businesses, change of control, or the exit of minority shareholders, going private transactions, and ownership transitions.

American Capital Strategies is not a dividend aristocrat but is a component in S&P 500 index. It has been increasing its dividends for the past 10 consecutive years however, while delivering an impressive average total return of 19.50 % annually to its loyal shareholders.


At the same time the company has managed to deliver a notable 11.60 % average annual increase in its EPS since 1998. If we look at the earnings chart though, it looks as if the EPS has been range bound, never been able to exceed $7.

The trend in ROE has followed the trend in EPS closely over the past decade, rising as high as 31% in 1999 and falling as low as a negative 1% in 2000. The average return on equity has remained at 11.30%. Annual dividend payments have increased over the past 10 years by an average of 9.80% annually, which is slightly below the growth in EPS. A 10% growth in dividends translates into the dividend payment doubling every 7 years. If we look at historical data, going as far back as 1998, ACAS has indeed managed to double its quarterly dividend payments every four and a half years on average. If we invested $100,000 in ACAS on December 31, 1997 we would have bought 6906 shares. Your first quarterly check would have been $1,726.50 in March 1998. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend payment would have risen to $17,095 by December 2007. For a period of 10 years, the quarterly dividend has increased by 300 %. If you reinvested it though, your quarterly dividend income would have increased by 890%.
The dividend payout has fluctuated greatly, along with the EPS and ROE. The current ratio of 94% does look a little high. When put into the perspective of the past 5 year’s average of 88% though, it looks pretty normal for the company. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. I think that ACAS is attractively valued with its low price/earnings multiple and above average dividend yield. ACAS is every dividend investors dream stock with its above average dividend yield and dividend growth rate. It should be part of every dividend investor’s portfolio.

Disclosure: I own shares of ACAS
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7 comments:

  1. Great review. I recently bought more shares of ACAS and it is my second largest holding.

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  2. Div Guy,

    I am more of an equal weighting type of guy.. I don't want to be too concentrated in one particular stock or sector. But ACAS does look like a great company..

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  3. This comment has been removed by the author.

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  4. Good review. ACAS is my favorite dividend company.

    Best Wishes,
    Dividends4Life

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  5. The diversity of ACAS' portfolio companies allows me to benefit from ACAS' effort not to be enslaved to economic cycles for returns. One reason I am especially excited about ACAS is that it is likely to remain underpriced because it is widely misunderstood by analysts.

    The longer ACAS remains irrationally underpriced (that is, priced by a market characterized by fear and uncertainty rather than data and considered evaluation), the longer we can expect high-yield reinvestment through the DRIP.

    Assuming that when financials are again loved by the analysts, ACAS again trades at a premium to NAV, ACAS' drip will enable below-market reinvestment, which is a nice bonus.

    My own comments on ACAS are tagged and include posts on AGNC.

    Take care,
    --J

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  6. With all due respect, I think dividend investors (and all others) should avoid ACAS.

    American Capital, like other BDCs, depends on continuous access to the capital markets to grow. As we know, the capital markets are shot and it's impossible to predict how long they'll stay that way. ACAS is trading under book value, and if it must issue equity it will dilute shareholders.

    Worse, they may trip their own loan covenants if their book values continues to deteriorate - and there's a good chance it will do so. ACAS already reported a significant spike in problem assets.

    All the private equity companies have taken severe hits in this market. Allied Capital, ACAS' closest competitor, is already facing financial distress.

    Even if ACAS doesn't go under, I still think dividend investors should look elsewhere. This stock's earnings, as demonstrated vividly by the graphs, are very lumpy. If I am buying something as a dividend holding, I'm looking for a steady business - like Realty Income, Genuine Parts, Johnson and Johnson or US Bancorp. I might speculate on something like ACAS, but I sure wouldn't buy it for the dividends.

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  7. W,

    Thanks for your opinion. I am not a fan of ACAS anymore after they suspended their dividend for 4Q 08.

    I think that companies like Realty Income will also be hit hard by the credit crisis, as they also need credit and stock offerings to expand.

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