American Capital Strategies (ACAS)

• The company pays an attractive dividend that it has increased annually every year since its IPO in 1997.
• The company's stock has outperformed the larger stock market in all but one year since going public.
• The company has shown robust operations over its public history, a period that spans a previous credit crisis in 1998 (LTCM, Russian default, Asian currencies), a stock market implosion with the dot-com bust in 2000 and the recession that followed in 2001/2002. This suggests the company will hold up even if an American economic slowdown is on its way.
• Conservative approach to building assets combined with a shareholder friendly stance as evidenced by the DRIP discount.
• AmCap's ability to buy out companies as well as providing debt financing (One-Stop Buyout) gives it an advantage over other BDCs and private equity funds.
• The company estimates it has one of the lowest costs of capital in the business (8 - 10% vs. 15 - 20% for private equity funds).
• Current market turmoil could present bargain opportunities.
• Historically, dividend payouts have been mostly covered by NOI, give or take a few percentage points. The company also pays a small tax penalty to retain earnings, thus cushioning any impact to future dividends.
• Over the last few years, AmCap has steadily moved up the capital structure in their portfolio investments. Senior debt is now the largest component of their portfolio (@ ~30%) as opposed to subordinated debt (~20%)or equity. In 2001, subordinated debt dominated their portfolio at over 50%.^[1]

1. ↑ http://www.enlightened-american.com/wealth/research/acas_report_upside.htm

ACAS' balance sheet currently has a cash cushion of just over $37 million. The debt they carry though, amounts to over $4 billion. This is prudent leverage on the assets that the firm has under management, and the annual operation margin (for a trailing 12-month period) is a strong 72%. Despite the accounting write downs, cash flow is still very strong in this company, with over $400 million in operating cash flow on a trailing 12-month basis.

Revenue declines will bottom in '08, and next year (2009) a return to high annualized revenue levels of about $1.3 billion. This estimate is in line with the analysts' best guesses as well, although some 2009 revenue estimates range as high as $1.5 billion. This is a great long term opportunity as it makes its transition through the trough of the financial crunch.

ACAS pays a significant dividend to its shareholders, with the latest distribution being $0.31 per share payed for the most recent quarter. Annualized, that's at least a 5% dividend yield on today's price of $22 per share.

The company itself is working to change the market's assessment of its business. Management has argued that it is incorrectly lumped in with the low-multiple BDC sector. They point out that their private equity business and asset management segment warrant multiples closer to groups like Fortress Investment Group or the Blackstone Group.