ACAS American Capital, Ltd.

On Thursday, American Capital Ltd. (ACAS) announced the buyback of its $75 million common stock in open market since early August. Common stock of 9.1 million shares has been repurchased at an average price of $8.21 per share.

Since August, out of total 9.1 million shares, 4.9 million shares have been repurchased at an average price of $8.12 per share. Further, in September till date, 4.23 million shares have been repurchased at an average price of $8.31 per share.

Concurrently, American Capital foresees additional stock purchases or dividend payments by the end of December 2012 and announced the program for the same.

Based on certain factors, the new program has been adopted. To begin with the new program, American Capital has planned to keep aside certain amount either for stock repurchases or dividend payments, quarterly.

The quarterly amount will depend upon 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 amount.

Last but not the least, the current trading price of American Capital's common stock, financial liquidity and ongoing economic conditions will also be considered.

According to the company’s plan, if the price of American Capital's common stock trade at a discount to the net asset value of shares, then the company will opt for share repurchase. On the flip side, if the price of American Capital's common stock trade at a premium to the net asset value of shares, then the company will opt for dividend payments.

The authorization of the new share buyback program and resumption of dividend payments raises our hopes for enhanced investor confidence.

Earnings Recap

American Capital’s second-quarter 2011 operating income of 20 cents per share was in line with the Zacks Consensus Estimate. However, results outpaced the prior-year quarter’s earnings of 9 cents per share. The favorable outcome was due to a drop in operating expenses, though partially offset by a decline in interest and dividend income in the reported quarter. American Capital’s asset coverage ratio increased to 376% from 336% in the prior quarter.

American Capital’s successful restructuring of debt provided it with sufficient operating flexibility. Moreover, the company also 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.

American Capital currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals, we are maintaining our long-term Neutral recommendation on the stock. One of the prime competitors of ACAS, Ares Capital Corporation (ARCC) also retains a Zacks #3 Rank.

 
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