American Capital Earnings: An Early Look

Earnings season is in full swing, with huge numbers of companies having already given their latest numbers to investors. The key to making smart investment decisions with stocks releasing their quarterly reports is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed kneejerk reaction to news that turns out to be exactly the wrong move.

Let's turn to American Capital (ACAS). The business development firm is rare among its peers in that it hasn't paid a dividend for years, but the stock has rebounded sharply lately. Let's take an early look at what's been happening with American Capital over the past quarter and what we're likely to see in its quarterly report on Monday.

Stats on American Capital

Source: Yahoo! Finance.

Will American Capital keep seeing shares soar?
During the past three months, analysts have held their views on American Capital steady, with even full-year projections climbing by just a single penny. The stock, though, has continued its bullish run from earlier in 2012, rising nearly 10% since early November.

A big part of that run-up has come from the company itself. In December, American Capital said that it had spent more than $100 million to buy back 8.8 million shares. The stock has risen beyond the level of the buyback, and given how well past buyback operations have gone throughout 2012, with buys at prices from $7 to $11, management clearly hopes that its purchases continue to do well.

Still, many wonder why the company doesn't pay a dividend. By contrast, rival BDCs Prospect Capital (PSEC 0.92%) and Apollo Investment (AINV 0.87%) have extremely healthy dividend payments, yielding around 11% and 9% respectively. But unlike American Capital, both Prospect and Apollo trade near or above book value, making share repurchases a less attractive use of shareholder capital.

One of American Capital's most exciting opportunities in recent years has come from its management of mortgage REITs, with American Capital Agency (AGNC 0.22%) long sporting double-digit dividend yields from selling agency-backed securities, while the newer American Capital Mortgage (NASDAQ: MTGE) also invests in other types of mortgage securities. Yet as the Fed's intervention in mortgage-backed securities markets has raised concerns about the sustainability of the mortgage-REIT business model, the fact that American Capital also acts partially like a private equity firm and partially as a pure business development company arguably gives shareholders greater diversification.

In its quarterly report, look for American Capital to give useful updates on where it's investing capital and where it sees its best opportunities going forward. As hard as it is to parse out American Capital's diverse business activity, it's a useful gauge for what's happening both in the mortgage-credit markets, as well as smaller-business financing.

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