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Buyback at Fairfax


valueinvesting101
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I agree, especially at an average price of $370.15/share!  (It is a 13% rate of return on the repurchase)

 

I think you meant to post this link: http://www.fairfax.ca/news/press-releases/press-release-details/2013/Fairfax-Financial-Holdings-Limited-Intention-to-Make-a-Normal-Course-Issuer-Bid/default.aspx

 

It is good to see them buying back-- albeit, a tiny sum: ~0.6% of float

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If that capital was used to purchase additional shares in another company we would be capturing the rate of return on that investment. Why can't we look at the rate of return on this capital being returned via repurchasing your own stock?

 

Tks,

S

 

 

Are you proposing that share-repurchase return-math (that is, the repurchases' effect on per-share intrinsic value) be based upon the market price of the stock following the repurchase? Why is that?

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If that capital was used to purchase additional shares in another company we would be capturing the rate of return on that investment. Why can't we look at the rate of return on this capital being returned via repurchasing your own stock?

 

The purpose of a repurchase program is to increase per-share intrinsic value, right? If so, measuring the utility of a buyback must be done by comparing what per-share intrinsic value was before a buyback to what it is after.

 

If a CEO elects to retain all earnings and commit all capital to a share repurchase program, what is the effect? As the number of shares outstanding falls, earnings-per-share rises. If the multiple stays the same, the stock price must rise. It's the holy grail of stockholder returns; except it's not. What's smart at one price is dumb at another, and if the company elects to repurchase shares at 2 times per-share intrinsic value, every share repurchase incrementally destroys per-share intrinsic value. In this scenario, even though per-share price is rising, per-share value is falling.

 

 

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Every year for at least the last 5 years they've announced this normal course issuer bid at this very time of year, and every one of those years they haven't reduce the share count.  Instead, they've paid dividends which forces people to pay tax even if they don't need the cash and just want to buy more FFH shares anyhow.

 

 

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They have made these announcements the exact same week every year, and bought almost no stock during that time.  Rest assured, if Fairfax gets pummelled some day and has the cash they may actually execute on this.  The two situations of excess cash, and cheap stock have not coincided since the early 90s. 

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