If done correctly, they can be of enormous benefit to shareholders.
After writing yesterday's column on overpriced buybacks, I began to wonder who is buying back stock at undervalued prices. Buybacks conducted at proper process can be of enormous benefit to shareholders. It increases your ownership in the company and lifts the earnings per share, which should make the remaining shares worth that much more in the marketplace.
As long as they are done with existing cash and cash flow and not from borrowings, a stock buyback at the right price can be an enormous positive. So I sat down this morning to see which companies were buying back stock below book value and are worth further investigation.
I have not yet pulled the trigger on Atlas Air Worldwide (AAWW), but I am getting close to my "I have to buy it now" point. Its financials and outlook improved quite a bit in the past quarter and it is almost too cheap not to own. The stock trades for less than 70% of book value right now, so it is definitely cheap. Earnings will be down this year as a result of less business from the military; plus, the weak economy is keeping something of a lid on the freight markets.
The company's long-term future looks much better for the company and this stock is a strong candidate for an impressive three-year rebound. Trading at just half the 2011 highs, it is not unreasonable to assume that the stock will recover much if not all of the lost ground when the global recovery gains strength. Management seems to think so, as they repurchased 1.7 million shares of stock last year.
There was a lot of buzz around the single-family real estate investment trusts (REITs) when they first started to come on the market. The housing market was still falling across the country and it was widely assumed that this would be a high yielding strategy that offered investors a way to benefit from the eventual rebound. That has not happened yet as the costs of getting the homes into move in condition and finding renters has been greater that originally assumed.
Silver Bay Realty (SBY) was one of the first initial public offerings (IPOs) in the sector and the stock has not fared well, as investors lost interest and sold the stock when the story did not unfold exactly as anticipated. The stock now trades at 90% of book value and about 80% of managements estimate of asset value. Business is getting better as occupancy rates have increased steadily and jumped high by 7 percentage points to 88%. The REIT may not have a huge dividend payout but it does own a lot of real estate that it purchased near the bottom. The company's future is now looking much better and management repurchased 250,768 shares under the share repurchase program at an average price of $15.35 in the fourth quarter.
Shares of FBR & Co. (FBRC) have doubled since I recommended them back in 2011 but they still trade for a little less than book value. Business has rebounded sharply for the investment bank as banking revenues more than doubled and institutional brokerage commissions rose slightly during the year. Book value grew by more than 30% in the year as the company continues to benefit from changes made in the past few years -- such as selling the asset management business.
The company's future looks pretty bright as its expertise includes several industries, including financial services, community banks and energy, which are expected to see a lot of mergers-and-acquisitions (M&A) and restructuring activity. Management must like the outlook, as in 2013, they bought back 2.4 million shares at an average price of $23.36 per share.
The dominate sector on the list of smart buybacks is the little banks. More than half of the 83 stocks on my list are small banks that trade at significant discounts to their book value. The only two large enough to mention here are ESSA Bancorp (ESSA) and Prudential Bancorp (PBIP), which trade at 87% and 78% of book value, respectively. It will be worth the effort to look for the little $20 million and $30 million banks that qualify as executives at the "Trade of the Decade" names and are buying their stocks well below book value.
Buybacks done right can be of enormous benefit to shareholders. In today's buyback crazed environment, there are still a few companies doing buybacks at low valuations that are worth consideration by long-term, patient investors.