Thursday, October 13, 2011

JPMorgan Repurchases $ 4.4 Billion in Stock

In JPMorgan's (JPM) latest quarterly earnings released this morning, the bank announced that it had bought back $ 4.4 billion of stock during the quarter.

At that rate of repurchase, the bank could cut its shares outstanding just about in half in a little over 3 years near the current share price.

In his recently released 3Q 2011 letter to shareholders, Mason Hawkins had this to say about share repurchases:

Mason Hawkins On Share Repurchases
While the market is ignoring positive fundamentals, many of our investees are using the negative sentiment to meaningfully grow value through share repurchases. When stocks completely decoupled from corporate values in late 2008-early 2009, we called on our CEO partners to repurchase as many shares as possible. A few responded, but most were too fearful of how bad the economic damage might become to aggressively use any cash cushion. Today, most of our corporate partners see minimal growth but believe that their strong business prospects over the intermediate term make repurchasing today's discounted shares the optimal capital allocation choice. Our portfolio companies collectively are shrinking shares at an average 4% annualized rate, with CEOs at DIRECTV, Travelers, Philips, FICO, and Wendy's repurchasing at a rate in the teens. Warren Buffett has initiated Berkshire Hathaway's first buyback. Not only have strengthened balance sheets and strong cash flow given companies the arsenal to steal shares, beneficial capital allocation work over the last two years has put our partners in a much improved position.

With building a sufficient capital cushion a top priority during the financial crisis, banks could not (weren't allowed by regulators) allocate capital to the repurchase of undervalued shares. As a result, long-term holders of the stock could not benefit from the buying back of shares when they were selling at enormous discounts to intrinsic value.

That's no longer the case for the stronger banks. No doubt it can be annoying to stare at an undervalued stock price quote on your computer screen. If value has been judged well, of course. If not, it's more than annoying. Yet, as long as the business is financially sound, an undervalued stock that remains that way for an extended period that is bought back persistently* creates huge benefits for the remaining long-term owners.

When some of the other partners in ownership are willing to sell their share of the business at something like half what it's intrinsically worth I see no reason to complain.

Of course, whether or not what is causing the stock to decline could permanently impair or damage the business franchise needs to be understood.

Otherwise, if the business remains sound...no worries.

Adam

* Unfortunately, sometimes shares are bought back when the stock is not cheap or as a way to prop up a share price.
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