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No. of Recommendations: 6
Hello Fools,

A quick update for the eagle-eyed among you, who might have noticed that the purchase price of AINV has gone down on the scorecard.

Recall from the original write-up, the following:

"Fools should know that Apollo Investment maintains an "opt-out" dividend reinvestment plan. Cash dividends are automatically reinvested in additional shares unless investors explicitly decline and opt for cash. BDC dividends are taxed as ordinary income and don't receive favorable dividend tax treatment, so if you plan to opt out of the reinvestment plan, consider buying Apollo Investment in a tax-favored account."

Now, the dividend is arguably the thesis here. Or, rather, because of the BDC structure, investors in Apollo are 'choosing' their return largely in the form of dividends, rather than capital gains. This requires recognition on the scorecard.

What we are doing is an isolated form of time-weighted return here. This means that we are virtually reinvesting the dividend received (as of the ex-dividend date), into AINV at the opening price the morning after the stock goes ex-dividend. We first calculate a multiplier for our cost basis to reflect the dividend received and reinvested, and then calculate a dividend-adjusted cost price.

Here's the math behind all this:

Ex-Dividend Date: 18-Mar-08
Price at Recommendation: $14.88
Dividend: $ 0.52
Opening Price - Day after Ex-Dividend: $16.01

With First Dividend:
Multiplier of Original Price = 1 /(1 + (Dividend / Ex-Div Price)

With Subsequent Dividends:
Multiplier of Original Price = Previous Multipler /(1 + (Dividend / Ex-Div Price)

Net Result Today:
Multiplier = 1 /(1 + (Dividend / Ex-Div Price)
Multiplier = 1 /(1 + ($0.52/$16.01)) = 0.968542

Dividend-adjusted cost basis = 0.968542 * $14.88 = $14.41

As a broader example, imagine you bought AINV at the IPO on 8-Apr-04, paying the IPO price of $15. With the stock closing today at $16.11, without accounting for the dividend, that's a 7.40% total return since IPO; compared against an 18.36% return on the S&P 500, that looks rather disappointing. However, they've also paid $6.115 in dividends since IPO. When you bring the dividend in, a very different picture emerges. Using the method developed above, here's what the return - including dividend - looks like:

Ex-Dividend Next-Day Adjusted Cost
Date Dividend Opening Price Multiplier Basis
08-Apr-04 $15.00
21-Sep-04 $0.045 $14.07 0.9968 $14.95
21-Dec-04 $0.18 $14.90 0.9849 $14.77
22-Mar-05 $0.26 $17.15 0.9702 $14.55
21-Jun-05 $0.31 $18.00 0.9538 $14.31
20-Sep-05 $0.43 $19.69 0.9334 $14.00
20-Dec-05 $0.44 $18.39 0.9116 $13.67
10-Mar-06 $0.45 $18.34 0.8898 $13.35
20-Jun-06 $0.45 $17.92 0.8680 $13.02
19-Sep-06 $0.47 $20.09 0.8481 $12.72
19-Dec-06 $0.50 $22.24 0.8295 $12.44
20-Mar-07 $0.51 $21.57 0.8103 $12.15
19-Jun-07 $0.51 $23.75 0.7933 $11.90
12-Sep-07 $0.52 $19.80 0.7730 $11.59
17-Dec-07 $0.52 $16.42 0.7492 $11.24
18-Mar-08 $0.52 $16.01 0.7257 $10.89

Total Return: AINV = $16.11/$10.89 - 1 = 48.00%
Total Return: S&P500 = 1349.88/1140.53 - 1 = 18.36%

I'm comparing to the S&P500 as per standard Foolish practice (and understand I'm not looking to open that particular can of worms). For those so-inclined, feel free to compare against the S&P500 Total Return Index over that same time period - AINV has still outperformed. We, of course, expect it to continue doing so.

For what it's worth, this is the same methodology used over in Income Investor.

Feel free to hit with questions.


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