A lot of managers are unclear in communicating their stock buyback plans. They won't buy back shares, but nor will they tell shareholders that they have no intention of doing so. Shareholders are left holding the bag, wondering if management is being shareholder friendly or just pretending to be so. At the other end of the spectrum, however, are managers that are clear about their buyback intentions; these can generate extraordinary returns for shareholders. Consider Urbana Corp (URB), an investor in securities exchanges around the world.
Urbana has been previously discussed as a potential value investment on this site. At the time, its price tag seemed rather elevated. But since then, it has come down significantly. It is now at the point where once again the stock trades at a significant discount to the company's net assets, which are mostly comprised of publicly-traded exchanges such as the NYSE and CBOE.
Because of the large discount, management has bought back 10% of its shares. The company's cash position isn't large, so to effect the buyback program, management has shown a willingness to go so far as to liquidate net assets to some extent. If it weren't for certain regulatory restrictions on buybacks, it's likely that even more shares would have been repurchased.
Shareholders are not left guessing as to management's intentions going forward, either. As per the company's proxy statement:
"In regard to Urbana's share price, the environment...was...exacerbated by a few major Fund holders...becoming sellers in order to match their own fund redemptions. The resulting discount of Urbana's share price to the underlying asset value represented a significant opportunity for Urbana to profitably buy back and cancel...shares...Urbana's management anticipates continuing this program, to the extent allowed...as long as a significant discount continues to exist." (emphasis added)
Furthermore, the company's #1 goal for the coming year is to "Narrow the price/asset share discount or use it to redeem additional 'A' shares." This situation is reminiscent of the one we saw with Quest Capital, where management was very clear that as its portfolio converted to cash, it would seek to buy back shares to eliminate its discount to book value. That situation rewarded shareholders with strong returns, and hopefully this one is no different.
The stock exchanges are littered with companies with director authorizations for buybacks that go unutilized, even when said companies trade at massive discounts to liquid assets. This lack of communication does a disservice to shareholders. But when a management team is clear about its intentions and can be seen carrying through on them, shareholders can find themselves in a great position to achieve abnormal returns.
Disclosure: Author has a long position in shares of URB.AThis article was written by Saj Karsan of Barel Karsan. If you enjoyed this article, please consider subscribing to the feed.
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