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Allied Capital (ALD)
Old 08-17-2007, 03:19 PM   #1
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Allied Capital (ALD)

Time for an embarrassing story. I will occasionally research a stock in the wee hours and then send myself an email reminder to buy.

One morning I read one of those emails: "buy ALD." So, I did.

And then I realized that I had sent myself that particular email about 2 years earlier. Oops.

Well, it promptly went up about 10%, so that eased my angst a bit, and the dividend is HUGE, but in the end I wasn't comfortable with the investment, so I sold it for a short-term gain.

Now, I'm interested in reexamining the company in more depth. Looks pretty good on a fundamental basis, management, and historical performance is great (with reinvested dividends, of course).

But, I suspect this is a pretty economically sensitive sector (sort of small scale private equity), so I plan to wait for the next business cycle.

Anybody want to talk me out of waiting? FWIW, ACAS is a similar stock.
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Old 08-17-2007, 03:31 PM   #2
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Anybody want to talk me out of waiting?
Sure, go for it man. You only live once, what is ER for if not gambling and Just Do It.

(I get the same old TGIF feeling as ever, even after 20 years of ER.)

Ha
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Old 08-17-2007, 03:40 PM   #3
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Drinking already, Ha?

I thought you might like these guys. They're vulture capitalists, like you.
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Old 08-17-2007, 09:57 PM   #4
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Now, I'm interested in reexamining the company in more depth. Looks pretty good on a fundamental basis, management, and historical performance is great (with reinvested dividends, of course).

But, I suspect this is a pretty economically sensitive sector (sort of small scale private equity), so I plan to wait for the next business cycle.

Anybody want to talk me out of waiting? FWIW, ACAS is a similar stock.
I own some ACAS. I have bought some more twice in the last month around $36. Dividend is $3.6X for a yield around 10%. Pretty nice hikes most years. Book value is anticipated to be around $35 at year end . . . was $30 or so at the end of last year.

I've looked at ALD and almost pulled the trigger when it hit $27 since I thought I'd like to have the diversification of two BDC's instead of just one, but I like ACAS better because they cover a lot more (90% or so) of their dividend with interest/fee/management fee earnings (i.e. recurring earnings). ALD only covers about 50% of their dividend with ordinary recurring earnings -- the rest comes from those good years when they have capital gains. That said, from what I've seen, ALD's dividend should be secure for at least a couple more years as they have a lot of stockpiled capital gains (enough to cover 50% of the dividends for the next couple years. Of course ALD has a 50 year history of success and ACAS has 13 years (I think).

That's the short version anyway . . .
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Old 08-18-2007, 12:09 AM   #5
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Yup, dividends for both look solid and growing (at least as far back as Yahoo's history goes).

ACAS does look a bit better on paper, but I really need to dig into these guys a bit more. Cost of capital seems like it just went through the roof for them (10%-ish for ALD), and I don't have a feel for whether they can sustain deal flow in the current environment.

Time to read some SEC filings and play "armchair analyst"....
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Old 08-18-2007, 01:37 AM   #6
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Well, I took a short-cut and read a couple of analysts' research papers. I'm going to pass on ALD. Dividend looks solid, but it looks like equity deal flow has slowed, access to capital is tighter, and they're fully valued at the current price. Might look at them again if they get whacked.

FWIW, Morningstar says buy 'em when they hit $20 (currently at $30).
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Old 08-26-2007, 09:34 PM   #7
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I just read an article about ALD in Better Investing, It was under the heading undervalued stock. I have put them on my watch list now I am going to have to add ACAS too. I new to this ER planning.
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Old 08-26-2007, 09:43 PM   #8
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ALD is like Berkshire - a stock I've looked at periodically on and off for over twenty years - and never bought.

Sorta like baseball - you can strike out looking.

Swinging at 3 and 2 is optional.

heh heh heh -
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Old 08-27-2007, 12:21 PM   #9
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I have owned ALD for a few years now and as an income generating stock it has done very well for me and I plan on continuing to hold it for the forseeable future. It is important to understand that there are a lot of people who absolutely hate ALD, it is frequently attacked and heavily shorted and as a result it can be very volitile. That also provides regular buying opportunities, however, like we just saw recently.
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Old 08-27-2007, 12:36 PM   #10
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Interesting. 10% of the float is short. You'd really have to hate a stock to short it while paying a 9% dividend. I wonder if there will be a lot of covering before the next ex-div date.
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Old 08-27-2007, 01:15 PM   #11
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Interesting. 10% of the float is short. You'd really have to hate a stock to short it while paying a 9% dividend. I wonder if there will be a lot of covering before the next ex-div date.
Probably. That is certainly one of the reasons the stock is volitile.

Even if you don't own it, this is an intersting stock to follow. I don't know any other that has this much constant controvery surrounding it...especially without anything really material ever seeming to happen.
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Old 08-30-2007, 11:57 AM   #12
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I went a head and bought some ALD yesterday. I am looking forward to the 8.9% yield I will get.
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Old 11-09-2007, 10:10 AM   #13
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8/17 ALD = 29.58
11/9 ALD = 22.50 (approx)

I had been waiting for 26 back during the summer . . . it closed at 28.27 on Tuesday . . . released earnings on Wed . . . obviously not what people wanted in this market as it's down 20% in two days. They actually captured a lot of gains but also wrote down a lot of investments. I went ahead and bought some this morning.
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Old 12-18-2007, 09:18 PM   #14
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Anyone buying now? Why or why not?
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Old 12-18-2007, 09:22 PM   #15
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Drinking already, Ha?
Why do you say "already." Ha posted at 3:31 PM, well after cocktail hour begins. What are you waiting for?
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Old 12-18-2007, 09:36 PM   #16
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ALD is one of those black boxes that some Buffett-style investors hate. Based just on the numbers and their history, they look pretty tasty at their current price, but this one requires some faith in management. Do you have faith?
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Old 12-18-2007, 09:47 PM   #17
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I've menitioned the M* Dividend Newsletter in the past. Here is his write up on Allied Capital. The editor bought ALD about month after writing this up at 22.70. I sold Jan 22.50 puts last week. I hope it can exercise them.

Sorry for the formating but it is excerpted from the newsletter. I have not included the financial information associated with the write up since you can find this out on your own favorite financial website.

Allied Capital (ALD)

Itís about time I got around to reviewing this long-term
dividend champion. Allied Capital hasnít often
traded in the neighborhood of a buyable price, but itís
also a surprisingly volatile stock. If history is any
guide, buying opportunities could emerge at any time,
though long-term holders also have to be prepared
for unexpected short-term downward spikes.
What hasnít been volatile is Alliedís dividend stream.
The firmís been paying quarterly dividends continually
since 1963, with not a single reduction. (It also
pays out special dividends every so often.) While
dividend growth hasnít been especially impressive of
late (just 3.8% over the past five years), this summerís
credit crunch and the departure of competing middlemarket
financiers stands to accelerate Alliedís future
growth potential.
Allied has a way of attracting more than its fair share
of controversy. Itís a favorite of short sellers who
take issue with the firmís valuation methods, and
negative headlines with little or no basis in fact pop
up every so often. But the firmís dividend history
doesnít lie. Even if weíre not fans of some of Alliedís
corporate-governance practices, the fact that
insiders own some $450 million worth of stockóand
collect nearly $40 million in dividend payments annuallyó
suggests that their long-term interests are
clearly aligned with the firmís 190,000 shareholders.
Morningstarís Take
Allied Capital has a history of delivering solid returns
on equity and consistent dividend growth to
shareholders. It invests in small- to middle-market
companies, providing retail investors an opportunity
to participate in private equity.
Alliedís successful investment record has allowed it
to produce a return on equity of about 15%
annually over the past 10 years. The firm has a disciplined
philosophy that targets investments in
companies with strong free cash flow and high returns
on invested capital. Today, it faces increased competition
for new investments as capital pours into the
private-equity market. This provides challenges as the
firm sources new ideas, but we believe that by main-
taining its discipline, Allied can continue to produce
returns in excess of its cost of capital.
One of the largest feathers in Alliedís cap is that it
has maintained or increased its regular dividend
for more than 40 years in a row. The dividend currently
yields more than 8%. The total return Allied has
generated for shareholders has averaged 17.5% annually
from 1996 to 2006, compared with only 8.4%
for the S&P 500 over the same period.
The two main risks we see associated with Allied are
its dependence on the capital markets and the
valuation of the companies in which it invests. Without
continued access to equity capital at a premium
to book value, Allied would see its dividend growth
impaired. An active market does not exist for
many of the companies in which Allied invests. Therefore,
Allied must rely on valuing these companies
on the basis of expected cash flows, comparisons with
similar publicly traded firms, or other metrics,
making valuation a more subjective task in comparison
with valuing large public companies.
In our opinion, Allied Capital is a premier businessdevelopment
company. While investors should
not expect its stock price to appreciate rapidly, its
large and growing dividend should produce a strong
total return. We believe the shares are a prudent
investment for those looking for high current income
or exposure to the private-equity marketplace.

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M* on ALD part 2
Old 12-18-2007, 09:48 PM   #18
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M* on ALD part 2

here is part 2 of the write (14,000 character limit)
Is It Safe?
Because Allied chooses to be taxed as a regulated
investment company, it is not taxed at the corporate
level. Instead, Allied is obliged to pay out at least
95% of taxable income as dividends within two years
of the date it is earned.
Because the recognition of investment gains is lumpy,
earnings from year to year are rarely indicative
of the firmís underlying cash generation. We believe
Alliedís current dividend rate is well supported by
cash flow and a strong balance sheet. Debt/equity is
about 67%, well below the regulatory cap of 100%
for business-development companies. This provides
ample liquidity to continue funding current dividend
payments. In addition, Allied has two yearsí worth of
unrecognized investment gains with which to
fund dividend payments in the event of a downturn.
Will It Grow?
Allied believes its record as a successful long-term
investor and partner of management teams gives it an
advantage in sourcing new investments. Return
on equity has averaged 15% since a reorganization in
1997. We expect return on equity to average about
the same amount in the future, though it is likely to be
highly variable depending on the timing of periodic
investment sales.
Because Allied pays out the majority of its earnings, it
depends on the capital markets to finance growth.
Moreover, to finance dividend growth, the new equity
must be issued at a premium to book value. To date,
however, access to capital has not been a problem.
Allied has completed more than 40 equity issuances
since 1997, always at a premium to book value.
As long as the firm continues to deliver strong returns
on equity, its access to capital is likely to persist.
Our analysis is based on future dividend growth of 2.5%
annually, though a longer view of Alliedís record
(8% average dividend growth over the past decade)
suggests meaningfully faster growth is possible.
Whatís the Return?
At our Dividend Buy price of $28.90, Allied shares
would offer a current yield of 9.0% and a total return
prospect of 11.5% or more.
Tax Considerations
Because Allied Capital is a regulated investment
company rather than a traditional tax-paying corporation,
the portion of the dividend attributed to Alliedís
interest income is subject to ordinary income tax rates
rather than the qualified maximum federal tax rate
on dividends of 15%. However, a portion of Alliedís
annual dividend payments are often characterized
as long-term capital gains (and taxed at lower rates)
or returns of capital, which reduce the investorís
taxable cost basis and donít stand to be taxed unless
and until shares are sold. oe
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Old 12-19-2007, 07:04 AM   #19
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Thanks for posting that clifp. I've always wondered what Peters' write-ups are like.

I bought some more ACAS (American Capital) yesterday. I think the ALD price is good, I just consider ACAS a better investment primarily because they earn more of their dividend as ordinary income through asset management and interest/fees than ALD does. ACAS management is projecting a $4.19 dividend in 2008 (paying $1 for 4Q 2007) so its forward yield at the 12/18 close is 12.6%. It's hard to argue with the history of either company.

While a recession would be bad news for the BDCs, right now a lot of their competition is dwindling (other loan sources have either have gone out of business or don't have easy access to capital). Granted that also means that potential buyers of their businesses are also less likely to borrow large amounts and bid up the prices. FWIW, ACAS and ALD just did secondary offerings to raise more capital and both were priced at a premium to NAV . . . and at higher prices than they are now trading.

I think they are both at great prices to buy . . . unless we have a very serious and long recession. (I guess that's almost a truism, isn't it?)
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Old 12-19-2007, 03:01 PM   #20
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I checked out ACAS you are right that is an interesting looking company. M* doesn't follow ACAS not sure why it looks like the market cap is bigger than ALD. A long serious recession would really hose both these companies and my portfolio big time.
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