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American Capital Agency Corp. Message Board

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  • jtrader64 jtrader64 Oct 30, 2012 4:48 PM Flag

    Buyback Program

    Doc wrote: "When the company buys back those 4 shares, those 4 shares are usually cancelled or become resident in AGNC's Treasury and therefore are not counted as "outstanding". So, you see, the idea of the company owning the shares and the shares becoming an "asset" is wrong. Most times they(the bought back shares) are cancelled, destroyed, kaput, vaporized or whatever expletive you choose, but you get the idea.

    Yes, so if you were following my example, that is how the company went from 10 shares outstanding down to 6 shares outstanding by buying back 4 shares. I'm not saying these shares go on their balance sheet as an asset. I agree, the four shares are no longer outstanding.

    If you write my example down in a balance sheet format you'll see your Assets = Liabilities + Equity format works in my example. Here they are:

    Balance sheet before the buy back

    Assets 50
    Liabilities 0
    Equity 50

    Shares outstanding 10, book value per share = 5.

    Balance sheet after the buy back

    Assets 40
    Liabilities 0
    Equity 40

    Shares outstanding 6, book value per share = 6.66

    As for your PM example, I didn't look up the specific numbers but you have other variables at play there -- there are any number of things that can reduce book value per share over the course of three years. Just stick with a simple example and only change one variable like I did in my example and you'll be able to see it clearer.

    You can also read the press release from AGNC itself which states: "When AGNC purchases its stock at a discount to book value, it increases the per share book value of the remaining shares."

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    • Hey Jr,

      As I said at the outset I am not an expert on BV. I just read a lot and have found interesting gleanings on both sides of this issue. I think the main point I would ask about your example is, "Where are the liabilities in your calculations?"

      Using your example:

      I am assuming that liabilities remain unchanged before and after repurchase of shares. Lets use an arbitrary number of 30 for your example.

      BV = Assets - liabilities = 50 - 30 = 20 (divide by 10 shares) = 2 = BV/share

      After repurchase:

      BV = Assets - liabilities = 40 - 30 = 10 (divide by 6 shares) = 1.66 = BV/share

      I think the magic BE on BV/share is probably at current BV, before repurchase, and that is why the press release from AGNC issuing that statement, "When AGNC purchases its stock at a discount to book value, it increases the per share book value of the remaining shares."

      I assume, by that statement, that their hope is to repurchase below current BV. Should be interesting to see if they get that chance, since they have only given themselves until the end of the year to make that happen.

      Regards,

      DocReits

      • 6 Replies to reits_r_us
      • Adding extra liability to the equation changes the premise and the starting book value. Now your new starting book value is 2. This eliminates the possibility of buying back below book at 2.5. You have to select a new buyback price to maintain the argument that buying below book either increases or decreases value.
        Say that buyback price is 1.5. Equity then goes down by 6 instead of ten and is now 14 divided by six equals 2.33 for an increase per remaining share.

        No matter what you do to the numbers, equity goes down but value per share increases.
        Jt could have started with 100 assets and 50 liabilities and it would not have changed his original result.

        when I had just started cheering for any company to buy back under priced shares, I had forgotten to subract the price they paid from total company equity and my results were always inflated. Our parent ACAS has now spent , I dunno, about 400million on repurchase.
        for accretion of about a buck on book value. My numbers never matched theirs and I did not realize my mistake until you started these examples.
        Thanks again
        Luke

      • "Should be interesting to see if they get that chance, since they have only given themselves until the end of the year to make that happen."

        A might short on facts here, Doc, the management statement says December 31, 2013 (14 months); not the end of THIS year. Other assertions need shoring up as well before the dike springs a leak.

        Sentiment: Buy

      • "I assume, by that statement, that their hope is to repurchase below current BV. Should be interesting to see if they get that chance, since they have only given themselves until the end of the year to make that happen"

        The buyback runs through the end of next year, not this year:

        "BETHESDA, Md., Oct. 29, 2012 /PRNewswire/ -- American Capital Agency Corp. (AGNC) ("AGNC" or the "Company") announced today that its Board of Directors has authorized the repurchase of up to $500 million of its outstanding shares of common stock through December 31, 2013."

      • Doc - I responded with a complete example but it didn't post.

        The important though was that you changed the example I used in that you reduced book value before the buy back from $5 down to $2 but then you kept the buy back at $2.50. That is very different that what I was showing. In my example, I did the buy back below book value not above it.

        If you want to add in liabilities, change the before balance sheet to this:

        Assets $80
        Liabilities $30
        Equity $50

        Shares outstanding 10, book value per share is $5.

        Then do the buy back at $2.50 per share.

        Also, note that AGNC's buy back runs through the end of 2013, not the end of this year as you mentioned.

        But, yes, AGNC is only planning on doing the buy back should shares be trading at less than book value.

      • Doc - who is "jr"?

        The liabilities in my example were zero and my book value per share was $5 before the buy back. You reduced the book value in your example before the buy back down to $2 then did a buy back at $2.50 per share. That is not what I was trying to illustrate nor what AGNC is saying they would be doing. They would only do the buy back below book value.

        If you want to add some liablities in and still use the $5 book value before the buy back, try this:

        Balance sheet before the buy back

        Assets 80
        Liabilities 30
        Equity 50

        Shares outstanding 10, book value per share = 5.

        Balance sheet after the buy back

        Assets 70
        Liabilities 30
        Equity 40

        Shares outstanding 6, book value per share = 6.66

        You do seem to be understanding it better though becasue you made the comment "I think the magic BE on BV/share is probably at current BV, before repurchase..." Yes, BE on BV would occur if they did the buy back when BV = market price. They aren't doing that though. Again, it is only going to be done when BV is greater than market price.

        By the way, the buy back is through the end of 2013, not this year end.

        Will they get a chance to do it? Perhaps. Look at NLY, they announced a buy back and the stock is still trading below the book value at the end of the second quarter.

        Also, don't expect the buy back to start if the market price slips just under the book value. Management has some price in mind to make it worth their effort to do this. It might be $1 or more under book.

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