When management's interests are aligned with those of shareholders, agency costs are minimized. Management and shareholder interests are most aligned when the chief executive has a large portion of his wealth invested in the business; in this way, the manager is also a shareholder. This incentive alignment leads to actions that are shareholder friendly, which is not the norm in many companies.
Jewett-Cameron (JCTCF) is a company we discussed two months ago that not only appears to have a well-aligned incentive structure, but appears to trade at a discount to its intrinsic value. When these two circumstances appear in combination, you are likely to see a share buyback. Indeed that's exactly what happened, as last week the company issued a release that it would re-purchase its shares. But while share buybacks are rather common, the level of communication (continuing with this theme, as we have recently discussed how management's communication with shareholders can lead to either positive or detrimental results, depending on the extent to which it is done) in this release was a step above what shareholders are accustomed to.
First of all, the company stated that it would only purchase shares at prices below $7/share. (The current price is around $6.70.) In almost all cases, shareholders are not given any information of this nature, making it difficult for shareholders to include buybacks as part of their valuation models since the purchase prices paid for shares do not become public until well after the fact.
Second, the buyback program covers a period of only 2.5 months. (Most buyback periods are one year long, and even then many are not completed during this time frame.) This sends a strong signal that the buyback will be immediate (subject to the paragraph above), removing any fears that this is an attempt to talk the stock up rather than implement real action.
Finally, the buyback program covers a massive 18% of Jewett's outstanding shares, whereas most buyback programs cover less (sometimes far less) than 10% of the company's shares. As a result, it can serve to significantly increase the intrinsic value of each share.
When management has a stake in the company, it will make decisions that are good for shareholders. When those decisions are communicated in advance, investors can benefit, particularly if a stock is not well followed. (In Jewett's case, the stock price changed by just 0.3% on the day following the announcement.)
Disclosure: None
Saj Karsan
http://barelkarsan.com
Saj Karsan
http://barelkarsan.com
