An Open Letter to Bob Benmosche
- Posted by ToddSullivan
- on April 4th, 2013
First, let me say I’m a big fan, correct that, a huge fan. What you have accomplished at $AIG is nothing short of miraculous. Better still is the way you went about it. I do so enjoy the much needed “dressing down” of our public officials you are inclined to give them from time to time. More people should be doing that. They could use some humility.
Second, let me say in full disclosure I am a shareholder of both common shares (bought 2/12 @$26.78) and the 2021 $45 warrants (bought 2/12 @$7.24). So, needless to say I am quite happy so far. The Gov’t ownership is finally gone and you are free to run your business as you and the Board see fit. The company in my view is excessively capitalized (those who think otherwise just aren’t reading the filings) and looks to generate excellent cash this year and into the future. The question now is, where do we go from here?
I am not even going to address insurance operations because I will not pretend for a second to know more than you do in that arena. My concern is capital allocation.
I have heard you say on more than a few occasions that restoring a dividend and paying down debt was of primary importance to you in 2013. Therein lies my concern.
I am estimating $AIG’s current BV close to $60/share and should easily be closer to $70-$75 by year end. That means shares currently trade ~63$ of current BV and 50% of my high end range for year end. Given that dramatic discount. The ONLY responsible allocation decision is to be buying back as much stock as your regulators will allow you to. I’ll direct you to Warren Buffet:
From the 2012 Berkshire Annual Report pg 19
The third use of funds – repurchases – is sensible for a company when its shares sell at a meaningful discount to conservatively calculated intrinsic value. Indeed, disciplined repurchases are the surest way to use funds intelligently: It’s hard to go wrong when you’re buying dollar bills for 80¢ or less. We explained our criteria for repurchases in last year’s report and, if the opportunity presents itself, we will buy large quantities of our stock. We originally said we would not pay more than 110% of book value, but that proved unrealistic. Therefore, we increased the limit to 120% in December when a large block became available at about 116% of book value.
But never forget: In repurchase decisions, price is all-important. Value is destroyed when purchases are made above intrinsic value. The directors and I believe that continuing shareholders are benefitted in a meaningful way by purchases up to our 120% limit.
Buffett says “it is hard to go wrong when you buy dollar bills for 80 cents”… Mr Benmosche, you’d be buying them for 63 cents or less.
I understand the logic for paying a dividend as you stated “it attracts a different shareholder base”. That is 100% true, but, a rapidly rising stock price due to a rapidly shrinking share float will attract shareholders in much larger quantities.
Every financial metric available to us unquestionably favors large scale share repurchases over a dividend and debt repayment when the discount to book is this large and debt can be refinanced and extended at 3%-5%. In fact, (assuming regulators ok it), I’d even favor borrowing billions long at these absurdly low interest rates to fund large repurchases of the stock at this discount. Our immediate return per dollar used would be multiples of the sum total of interest we would pay.
For more on CEO’s who embraced this very theory and gave shareholders returns that were multiples higher than both the markets and other companies in their industry I’d suggest the book The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success. Each CEO, in various and unconnected industries from Newspapers, Cable Companies, Movie Theaters, Aerospace and others followed a similar capital allocation strategy that lead to outstanding shareholder returns.
For the perfect dividend/buyback policy I’d suggest one espoused by American Capital ($ACAS) (full disclosure I own it from 12/09 @ $2.96). Their policy is simple. If the share price is below BV, they use the funds for a dividend to buy shares. If it is above BV, they pay a cash dividend. This ensures they repurchase undervalued shares and pay out cash to shareholders when the stock is not being given away. That provides the best return for repurchases and is a tax efficient strategy for shareholders. It works, shares are up ~400% since.
Now, I understand long suffering large shareholders (those from ’07-’09) may be beating down your door for a restoration of a dividend. With all due respect, they should be ignored. For you to truly be doing what is in their (and all shareholders) best interest, you should be eagerly buying every single share that you can. That in fact is the proper use of your capital and will provide them with superior returns.
Now, I say this knowing the warrants that I hold are particularly sensitive to your paying dividends. Any annual dividend over $.675 entitles me to a strike price reduction and a number of shares adjustment. Being fully aware of this, I still object to a dividend being paid when shares are at such a discount to value (if they were at BV I would not be writing). The stock price appreciation and the gains I will see from an aggressive repurchase plan will be much larger than any dividend adjustments. I plan on holding these warrants for years, we have plenty of time to do the dividend thing with them.
A $10B repurchase plan for 2013 would at these prices provide a 40%-50% return on those funds to shareholders. It is unfathomable that any dividend policy could come close to that results.
I Thank You for all you have done so far….
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