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Advance America buying back stock

September 12, 2006 - Spartanburg, South Carolina

Advance America, Cash Advance Centers, prides itself on offering quick cash solutions to borrowers in need.

Lately, the Spartanburg-based payday lender also has offered cash to its shareholders -- up to a $150 million in the form of two stock buybacks. Publicly traded companies routinely use extra cash to buy back stock from shareholders to increase the value of shares.

But why, when posting quarter after quarter of growing financial results, does Advance America's board need to make such moves to reward shareholders, who have stood by a company in an industry under fire?

"They believe this is an attractive investment for the company and investors," said Jamie Fulmer, director of investor relations for Advance America.

Eric Powers, USC associate professor of finance, said Advance America shares are not the only ones underperforming on Wall Street. While continuing to gain in value, growth of the S&P 500 stock index has slowed during the past two years.

For Advance America shares, after closing at a high of $23.75 on Jan. 21, 2005, the company's stock price never again has approached that high-water mark.

On March 1, 2005, Advance America shares closed at $20.06 per share. A day later, the stock dropped in value by nearly 20 percent to $16.35 per share.

A year ago, the company's board authorized its first stock repurchase, worth $50 million.

At the time, Advance America's shares had been sliding in value.

Yet now, after nearly completing the $50 million stock buyback, Advance America's stock price hardly has moved.

For most of the past year, the company's stock traded in the $12 to $14 range. During the summer, the share price started climbing again, closing at $18 on July 25.

But that high also was short-lived. The value of Advance America shares plummeted in value by 26 percent two days later, closing at $13.31 per share.

Payday lenders are businesses that Powers said should be recession-proof. That is because as prices of goods and services increase -- but wages stay stagnant -- people increasingly turn more to such lenders.

"Advance America's business should be going up with the middle class getting pinched," Powers said.

The company's recent financial performance suggests that indeed is occurring.

For example, Advance America reported second-quarter same-store sales, at the 2,244 centers open more than a year, of $146.3 million -- an increase of $6.5 million from a year earlier.

Expansion drives much of that growth, but the payday lender also has healthy revenue growth in its stores open longer than a year.

Despite the growth, Advance America recently embarked on another stock buyback, this one worth up to $100 million. The company's motivation is simple, Powers said.

Wall Street has not been quick to respond to the company's financial performance, Powers said. He says that is mainly due to a general malaise among investors. He thinks every company is feeling the bite of a bear market.

In response, Powers said most corporate boards will try to reward shareholders, especially companies that have cash on hand.

As of June 30, Advance America's long-term debt was only $5.9 million, whereas the company reported having $34.3 million in cash.

There are a limited number of things a company can do with its cash, Advance America's Fulmer said.

If the company does not need its cash for expansion, that money can be used to pay off debt or be returned to investors in the form of dividends or stock buybacks, Powers said.

Powers thinks the only risk to Advance America's financial health is posed by state and federal regulators.

The industry is under continued fire from community activists, and state and federal regulators who have for the past several years placed more restrictions on payday lenders.

Advance America shuttered its operations in Georgia and North Carolina after laws in those states were changed. The company also has had to change the way it operated in a host of other states.

So far, though, Powers does not think news accounts of those changes to the company's business have been enough to scare off investors.

"It's possible the bad press is weighing on them," Powers said. "But it's not enough."

News Source

The State, Ben Werner, Staff Writer

Related Stories - Advance America Cash Advance Centers Inc. (NYSE: AEA)

Related Stories - Finances and Acquisitions

Related Stories - South Carolina


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