American Capital Reports a Boring Second Quarter

American Capital's second quarter results were something that the market has come to expect: light net operating income, a low return on equity, and a new plan for the future.

This quarter's results proved consistent with recent performance, though no blockbuster. Pre-tax net operating income tallied to $97 million for the second quarter, or $0.34 per diluted share. Its net asset value, or book value, grew to $20.35 per share, up $0.23 from the first quarter.

But wait, there's more!It's one thing to focus on the results during the last quarter, but what sticks out most prominently are a few particular items that affect the company's future.

First, going forward, American Capital anticipates buying back more stock, announcing that it intends to repurchase $300 to $600 million worth of shares before completing its spin off. This would be a significant amount by almost any measure. American Capital could repurchase as many as 23 to 46 million shares assuming an average price of $13.00 per share, or 8-16% of its weighted average share count at the end of the second quarter.

Previously, American Capital indicated that it wanted to minimize buybacks, suspending its repurchase program in March 2014 to retain capital prior to its spinoff. In the first quarter of 2015, it reauthorized its repurchase plan, suggesting it would buy back stock primarily to offset stock option grants to employees. As of December 31, 2014 -- it only provides a breakout of options and strike prices once each year -- outstanding stock options that were in-the-money or nearly so tallied to about 40.9 million shares.

Source: Page 109 of the company's 2014 annual report.

I've been very critical of American Capital's generous stock option compensation. And while a larger repurchase should be appreciated by investors, I continue to think that the lengthy weighted average life of insider stock options is responsible for some of the delays in spinning off American Capital's assets from its asset manager.

In addition, I think much of its recent underperformance can be attributed to the fact that insiders are compensated extremely well with options. Handing out stock options when your shares trade at a 35% discount to book value only compounds the cost of high compensation expenses.

Some steps toward the spinoff you've been waiting forThe company is taking steps toward spinning off its investment assets from its asset management entity. In the press release, American Capital's CEO, Malon Wilkus, said it is "on track to make initial regulatory filings this September." Additionally, it made investments in its ACE I and ACE II funds to meet statutory requirements prior to the spin off. And the asset manager is gaining steam: It added a new European debt fund in the second quarter plus a collateralized loan obligation to its collection of fee-earning assets after the quarter came to a close.

This story is, of course, evolving, and much of it can't be written until the company finally completes its spinoff. I'll be looking forward to the conference call for any indication of a timeline for when, exactly, American Capital plans to make its grand transformation.

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