Doc wrote: "BV, again, is based upon the company's assets. Cash is an asset, and is used in the computation of BV. They are paying 500 million for the shares, therefore their assets are reduced. The outstanding shares are not an asset. BV is reduced."
Take a simple example where a company had $50 in cash, $50 in book value and had 10 shares outstanding. The book value per share would be $5 each. Let's say also that you own 1 share of that company and that it is currently trading under book at $2.50 per share.
The company takes $10 and buys back 4 shares at 2.50 each.
The company now has $40 in cash, $40 in book value and 6 shares outstanding. The book value per share is now $6.66 each. As the holder of 1 share you saw your book value per share jump from $5 to $6.66. You now own a great percentage of the company.
The key here is to focus on what you own. You are thinking of it from a company wide standpoint -- yes the total assets of the company went down but what you own of that company -- your piece -- went up.
Just released: "Capstead Mortgage Corporation (CMO) (“Capstead” or the “Company”) today announced that its Board of Directors has authorized the repurchase of up to $100 million of its outstanding common shares. In connection with implementing this repurchase program, the Company has suspended its at-the-market, continuous offering program used to issue common shares."
Interesting. "Shares of Capstead Mortgage Corporation (NYSE:CMO) lose Wednesday’s post-earnings gain as its management debunks, via its earnings call, any notion of a buyback. Chief Executive Andrew Jacobs remarked that there exist more lucrative methods for the company to deploy its capital". Wall St. Cheat Sheet, 10/26/2012. What could it all mean?
"""The company takes $10 and buys back 4 shares at 2.50 each.
The company now has $40 in cash, $40 in book value and 6 shares outstanding. The book value per share is now $6.66 each"""
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.
BV, therefore goes down. Here is a blurb re. PM from a recent article:
"""We know the basic equation for the balance sheet.
Now, let us see what happens when a company buys back shares. Let us suppose that the company bought back $100 million worth of shares. This money goes out of the assets of the company. How do we account for this on the right side of the equation ? Well, this money goes out of the equity. And we get lower equity and lower book value. Not surprisingly if we look at the book value per share of PM we have the following data
Year 2010 / 2009/ 2008
Book value per share 2.18/ 3.26/ 3.94
So, here are the lessons to learn:
Share buyback reduces the book value per share and reduces equity hence increasing the debt-to-equity ratio. For companies doing share repurchases the decrease in book value per share is not a warning sign, the same goes for large debt-to-equity ratio. One needs to be careful when rejecting such companies using a screener or a black box method of not choosing companies with large debt-to-equity ratio and decreasing book value per share."""
No. Why did AGNC management say in the buy-back announcement that they intend to buy back shares when the current market price is below book value, thus INCREASING BV? Did they lie to us? OR, are they stupid, not "knowing" what you "know"?
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
Shares outstanding 10, book value per share = 5.
Balance sheet after the buy back
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."
r_hogge wrote "Why would the share price go to $6.66, when it was only $2.50 when the company bought the share, you have book value & share price are two different things."
Yes, they are two different things. I didn't say the shares would trade at $6.66, I said the book value would increase to $6.66. The only trading price I gave in the example was the $2.50 market price that the company bought the four shares at.
This is exactly what I was saying earlier; So long as the buyback is below the BV per share than the percentages should work out so that the number of shares decrease by an amount that increase the resulting BV/share at the expense of a decrease in assets.
The same logic works with an SPO doc; If you issue additional shares at an amount above BV it is acreative you not only increase the assets but the BV per share also increases. Instead of gaining additional shares at some value above BV you are getting rid of them at some level below.
I think the most important detail to glean from the new policy is managements intent to support the stocks price when it drops below book value.. at that point it becomes accretive to book value to buy shares back and maximize shareholder returns.
"As prudent stewards of your capital, we will seek to acquire common shares only when it is meaningfully accretive to our net book value per common share thereby further enhancing shareholder value."
Also the return on average equity from comprehensive net income is off the charts at 50%, while most of the market is reading this company as a dividend play it is obvious it has used leverage in a virtual money free environment to grow the company. The policy to borrow at such low rates of interest and buy shares that are yielding a 50% return makes good sense. With all that good accounting valuation going on, the pebble in the shoe still remains that management has not hedged accurately in the second quarter 1.029 bln in losses and 460 mln in the third quarter. It seems intuitive now given the feds signal for a permanent QE3 till unemployment abates that managment would steer away from putting to much insurance money on any interest rate spikes up.
One thing is almost clear that the environment for more share dilutions would seem to be counter productive unless interest rates go up. So no market risks for share dilutions decreasing trend in losses from hedging, and favorable resale valuation on MBS in inventory all point to better fundamentals over the next six months. Plus the shrinking number of share holders leaves room for potential increases in dividend, and eps over the next 6 months.
I think the foundation is solid for a buy recommendation here.