ACAS -- This article (below) appears prominently in today's wall street journal. Greenberg (the author) was notoriously involved in criticizing the company in 2002 when some hedge funds shorted the stock and then bashed it in the press. Jim Cramer (MSNBC now) was also involved. I don't remember the particulars, but I remember that Cramer had a financial short interest in ACAS through his or other hedge funds, and Greenberg was the mouthpiece. The stock dropped from the low $30s to under $20 for awhile, while the company defended itself and announced large insider purchases of shares. It was a great time to buy the stock.
> "A lot of times when I was short, I would create a level of activity beforehand that would drive the futures. . . . It's a fun game," Cramer said in the Webcast, which was moderated by TheStreet.com Executive Editor Aaron Task. A remarkably successful money manager when he ran the $450 million Cramer Berkowitz hedge fund, Cramer in the Webcast shared his "tips" on how to drive a stock price down so that a short-position - a bet that a stock price would drop - remains profitable. He added that the strategy - while illegal - was safe enough because, "the Securities and Exchange Commission never understands this."
But today's criticism, which has been circulating for a few weeks, is more rational than past illogical rantings and innuendo. There may be something not quite right here, but with managements' track record, that is difficult for me to believe. And ACAS has always surpassed the dividend guidance they gave at the start of each year. The present dividend yield is 11% ($4.19/$37.60). Here are clippings from the company, then the article:
> American Capital also announced a change to its dividend policy for net long-term capital gains. Previously, the Company retained these gains permanently by paying a 35% tax on behalf of its shareholders and treating the gains as a deemed distribution to shareholders. American Capital will now treat net long-term capital gains similarly to ordinary taxable income, making them available for the payment of dividends to shareholders... As a result of this policy change, American Capital will likely be required to distribute more cash dividends than under the previous policy.
> "We have had an 11% compound annual growth rate of our annual dividend over the past ten years, using our ordinary taxable income to fund this growth but not our net long-term capital gains..." said Malon Wilkus, Chairman, President and Chief Executive Officer of American Capital. "Our change in dividend policy should allow us to increase the growth rate of our dividends and, equally important, increase the amount of taxable income we retain for future dividends... We are currently trading at a 10% yield of our annualized fourth quarter 2007 declared dividend. If we were to trade at this same 10% annualized dividend yield at the end of 2008, based on our fourth quarter 2008 dividend guidance, we would produce a 23% total return for our shareholders, in line with our 21% annual return over the past ten years."
> American Capital is forecasting total 2008 dividends of $4.19 per share to be paid from ordinary taxable income and net long-term capital gains earned in taxable years ending in 2007 and 2008. American Capital anticipates that its 2008 ordinary taxable income and net long-term capital gains will exceed its dividends and it will retain the excess for future dividends... This represents a 13% growth over the total 2007 dividends of $3.72 per share.
Weekend Investor - WSJ
Dividend Darling American Capital
Changes Formula But Keeps Bravado
By HERB GREENBERG
December 1, 2007
When I think of the companies that have made me look the silliest, American Capital Strategies Ltd. is high on the list.
The Maryland-based business-development company invests in and lends to mostly small and midsize private companies that need cash or a partner in a buyout. It likes to compare itself with a growth-and-income mutual fund. In 2002, when it first hit my radar, its dividend yield, exceeding 10%, looked too good to be true. Higher rewards, after all, are supposed to equal higher risks, as many investors in the high-yielding subprime-mortgage space recently learned the hard way.
The bearish argument, which I tended to favor at the time, claimed that American Capital didn't really earn its dividend. It further suggested that once Wall Street figured this out, it would stop refilling the company's cash tank by readily buying its frequent secondary offerings.
American Capital said its critics were wrong, and started spotlighting its history of rising dividends with the slogan, "You can't restate a dividend." Investors agreed, flocking to American Capital's regular offerings as its shares outstanding more than quadrupled on a stock price that since late 2002 has more than doubled. Its dividends have jumped 49% in the same time. (In other words, I got it wrong.)
Why worry now? This time it isn't about whether the company earns its dividend, which still yields more than 10%, but possible viability and volatility of that dividend. And while not highlighting this as a possible problem -- not that any company would -- American Capital unintentionally was first to draw attention to it with an announcement several weeks ago of a changed "dividend policy."
A yellow flag pops up anytime a company makes any kind of change in something it has always done. The color turns red if the company is viewed largely as a dividend play and then changes the way the dividend is derived.
To understand the significance, you first need some background: Much like a real-estate investment trust, business-development companies like American Capital are required to pay out 90% of their taxable income in the form of a dividend. The income comes from a variety of sources, including interest and dividends from portfolio companies as well as the management fees they charge those companies.
American Capital traditionally has paid dividends exclusively from income, which in recent years has exceeded the amount of the payout. In the past, when it sold a company at a gain, American Capital booked a profit but didn't use the proceeds to pay the dividend. That makes sense because capital gains are unpredictable and dividends need to be paid out every quarter. Now, the company is adding these profits to the pool of money it uses to pay the dividend. Any excess is banked, almost as a cookie jar, in case of a dividend-related shortfall in the future.
More than the policy change itself, "it's the timing of the switch" that concerns analyst Scott Valentin of Friedman Billings Ramsey, one of a number of former American Capital fans who have grown increasingly cautious. According to Mr. Valentin, who has a history of not pulling punches, the change "reflects mounting pressure to maintain dividend growth" in the face of possibly slowing net-operating-income growth.
Wachovia analyst Jim Shanahan goes so far as to say he is "skeptical as to the sustainability of the dividend policy," especially if the company is expecting to count more on capital gains when the market for selling companies mightn't be as great as it had been.
But according to Chief Executive Malon Wilkus, his company's critics simply don't get it. He felt the same way when I first talked to him several years ago, except now he is far more emphatic. Not only does he believe the company's dividend is safe, but he says it will be far easier for American Capital to increase dividends, especially with the company able to charge more for loans in the credit crunch's wake.
He adds that critics "are completely wasting their time" on business-development companies "because by definition they are some of the strongest publicly traded financials because by law they are limited to a debt-to-equity ratio of 1 to 1." American Capital's, he points out, is even lower than that. "We have...one of the strongest balance sheets anywhere in the world of finance. As long as the balance sheet isn't levered," Mr. Wilkus says, "it isn't hard to pay the dividend."
I can't stress how confident he is about how right he is. Critics say he is overconfident. This is for sure: Both can't be right. |
