This year, companies are gobbling up their own shares by the tens of billions of dollars. Repurchases can create tremendous value when they’re properly timed. A company that purchases cheap stock reduces its share count and drives earnings per share growth. A combination of fewer shares and greater earnings is a double whammy for investors.
Financial firms are part of the buyback spree. Here are three financial firms that have repurchased more than 5% of their total shares outstanding in just the past 12 months
American International Group Inc (NYSE:AIG)
After struggling through the mortgage crisis and taking a billion-dollar government bailout, American International Group Inc (NYSE:AIG) is back in the black, generating huge profits from its insurance operations. The company reported first quarter earnings of $1.49 per share.
The company reported that its book value grew to $59 per share in the quarter, which was 12% higher than the year-ago period.
American International Group Inc (NYSE:AIG)’s earnings quality is still in question. AIG earned a reputation for writing insurance at any price, even if it was unprofitable. That reputation is fading, although the company’s combined ratio (a ratio that compares insurance premiums to total costs) still isn’t impressive. Property and casualty lines had a combined ratio of 97.3%, which means the company spent $0.973 on claims and business expenses for each $1 in premiums. Higher quality contracts and better pricing should help create additional margin expansion. Last year, the company had a combined ratio of 102.1%.
American International Group Inc (NYSE:AIG) has significantly cut its total share count, acquiring shares cheaply. AIG drove its share count from 1.9 billion shares in 2012 to 1.47 billion shares as of the first quarter 2013 earnings report. Consistent repurchase authorizations have been funded with operating earnings and the sale of non-core assets. The company will look to shrink its debt in 2013 to maintain high credit ratings before hopefully restarting aggressive repurchases in 2014. This could give investors a chance to buy in at a lower price, although the company trades cheaply to the entire market, at 10 times forward earnings estimates.
Discover Financial Services (NYSE:DFS)
Credit card financing and processing is a very big, very profitable business. This year, Discover will be taking care of shareholders, dedicating more than 100% of its income to slash its outstanding share count.
Discover Financial Services (NYSE:DFS) is one of the most aggressive buyers of its own stock. Shares outstanding fell from 533 million to 506 million in 2012. Diluted share count was reported at 497 million shares in the first quarter of 2013 after the company announced a new $2.4 billion repurchase authorization to replace an authorization with $600 million remaining. In April, the company’s board of directors also approved a 42% increase in the company’s quarterly dividend to $0.20 per share.
Discover Financial Services (NYSE:DFS)’s impressive lending growth is fueling excellent capital allocation. The company grew loans by 7% while increasing its net interest margin to 9.39% as it launches new credit card lines, issues private student loans, and enters the personal loan business. Charge offs remain low at 2.3%. Discover’s interchange business also showed impressive year over year growth of more than 9% compared to the year-ago period.
At less than ten times forward earnings estimates and as one of the best capital allocators in banking, Discover Financial Services (NYSE:DFS) is a value play of all value plays.
The Chubb Corporation (NYSE:CB)
While American International Group Inc (NYSE:AIG) earns a reputation for risky insurance dealings, The Chubb Corporation (NYSE:CB) is known as one of the highest-quality underwriters in the world. The company focuses on property and casualty insurance for individuals and businesses, pricing in large underwriting profits few insurance companies can match.
The company realized operating income of $2.14 per share in the most recent quarter on the back of a favorable environment for property and casualty insurers. No major catastrophes helped fuel the impressive results, which were 26% better than a year ago. The company’s combined ratio came in at an abnormally low 84.6%.
Premium growth reveals a more accurate picture of this slower-growing insurance giant. The Chubb Corporation (NYSE:CB) recorded net premium growth of 4% year-over-year. Executives commented positively on customer stickiness, noting that renewal rates improved tremendously. Customer acquisition costs remain one of the biggest expenses in insurance; keeping customers for longer contracts drives long-run increases in total profitability.