In yesterday's column I talked about what I think is one of the worst financial engineering activities of our time. Buying back stock with shareholder cash at elevated valuations is a horrific use of capital, in my opinion. The excuse that "we can't find anything else to do with the money" is getting tired. If you cannot find anything more productive that buying back stock at high multiples of earnings, EBITDA and assets, simply send it back to me. I am sure I can find something to do with it. I could even reinvest in the stocks of companies who are more judicious about buying back stock. While there are not many there are some companies that are buying back stock at discounted valuations, which I think is a pretty smart move.
American International Group (AIG) has been buying back stock with both hands this year. In the first quarter of the year it repurchased 17.4 million shares for $867 million; in the second quarter, it bought 18.1 million shares for $1.1 billion. Back in June, the board authorized an additional $2 billion buyback. The insurer has also been buying back debt and firming up the balance sheet. In the first six months of the year, long-term debt was reduced from $41.7 billion to $29.6 billion.
AIG has been refocusing its business on basic insurance and retirement products, and appears to be achieving a good deal of success in the transition. The stock is still trading at just 76% of book value, so shareholders are buying a bargain with the buyback programs. The stock is heavily owned by hedge funds and indexes, so I would be more inclined to buy shares of AIG in a market swoon, but I like what the management is doing to turn the business around and use shareholders cash wisely.
Richardson Electronics (RELL) has been a consistent buyer of its own stock. The total shares outstanding have dropped every year since 2011. The company provides engineered solutions, power grid and microwave tubes, and business has been slow due in large part to the slow economic recovery. At the end of the last quarter, CEO Edward Richardson was upbeat about the longer term, telling investors: "we will continue to use our cash and investments to make strategic acquisitions, invest in growth initiatives, and repurchase our stock." The stock is trading at just 80% of book value and it has about 90% of the market capitalization in cash on the books. Richardson also pays a dividend and the current yield is 2.4%.
Small banks have also been enthusiastic buyers of their own shares at bargain prices. I was pleased to see that some of my "trade of the decade" names are on the list of companies buying back stock at very low levels. Increased dividends and stock buybacks are just two of the drivers behind what I think is one of the biggest investing opportunities of my career. As the credit problems of the real estate crisis and recession are fading into the rearview, banks have rebuilt their capital base and many are taking advantage of the low price-to-book-value multiples in the sector to buy in stock on the cheap.
ESSA Bancorp (ESSA) is one of my favorite small banks stocks. It has been buying back stock with a good deal of enthusiasm. Earlier this year, it announced its sixth 5% buyback plan. The stock is trading at just 85% of tangible book value right now, so it is definitely a bargain issue. CEO Gary Olsen was straightforward about his determination to build shareholder value in the last earnings release. He said: "key measures of shareholder value resulting from the company's operating performance have increased, which we have enhanced through stock repurchases and cash dividends." In addition to the buyback, ESAA has a dividend yield of 2.46%.
Other trade of the decade banks buying back stock below book value include HopFed Bancorp (HFBC), HomeTrust Bancshares (HTBI), Simplicity Bancorp (SMPL) and Westfield Financial (WFD), Its worth mentioning that there is a bunch of even smaller banks that are also buying bank their stock at bargain levels. It is worth your time to dig and search for these microcap banks and thrifts.
I am not a fan at all of stock buybacks at high multiples of earnings and asset value. However, companies that are buying stock below book value are excellent candidates for long-term gains.
