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Rupert Hargreaves
Rupert Hargreaves
Articles (1317)  | Author's Website |

A Closer Look at Mohnish Pabrai's 'Uber Cannibals'

Some thoughts on the value investor's buyback strategy

In December 2016, Mohnish Pabrai (Trades, Portfolio) outlined what he called his "Uber Cannibals" investing strategy. The strategy was built around the simple idea that businesses aggressively buying back their own stock can outperform the market in the long run.

Since first publishing this idea, the value investor has published a list of his favorite Uber Cannibal stocks every year. At the beginning of this year, he outlined five new opportunities on his blog:

  1. Assured Guaranty (NYSE:AGO)
  2. Primerica (NYSE:PRI)
  3. Globe Life (NYSE:GL)
  4. Navient (NASDAQ:NAVI)
  5. Discover Financial Services (NYSE:DFS)

Assured Guaranty has been aggressively repurchasing its outstanding shares over the past five years. In 2014, the company had over 173 million shares outstanding. Since then, it has reduced the number to below 95 million. This has had a significant impact on the book value per share figure. It has increased at a compound annual rate of 14.4% since 2014, from $36.40 per share to just under $77 per share.

The stock price has not kept pace with this explosive book value growth. It is currently changing hands at just under $20 per share, which suggests the company is dealing at a price-book ratio of 0.25.

On top of its aggressive share repurchase plan, Assured also offers a dividend yield of 4.2%. Over the past five years, this distribution has been increased at a compound annual rate of just over 10%.

According to Morningstar, based on its current share repurchase run-rate and dividend yield, the stock currently supports a total shareholder yield of 41%. This does not seem sustainable, but if the company continues to buy back stock at the pace it has been for the past five years, the number of shares outstanding could reduce by a further 75% by 2030.

Financial companies feature heavily on Pabrai's latest Uber Cannibals list. Primerica is a distributor of financial products to middle-income households in the United States. Like Assured, the company has been aggressively repurchasing shares over the past five years, with the number of outstanding shares of the business decreasing by an average of 5% per annum since 2014.

On top of this, the stock also supports a dividend yield of 1.3%. Book value per share stands at $41, so unlike Assured, the stock is trading at a premium to book value.

Still, Morningstar calculates that its total shareholder yield currently stands at 7.3%. That's highly impressive considering the interest rate environment.

Globe Life is a financial insurance holding company. Like the two financial services businesses listed above, the group has been using excess capital to repurchase stock over the past five years aggressively. Its average number of shares outstanding has declined at a compound annual rate of 3.4% since 2014. Meanwhile, an increase in shareholder equity has seen book value per share grow around $37 to nearly $74. A dividend yield of 0.9% is currently on offer for investors as well.

Globe Life has been more conservative with its share buybacks and dividend policy than the two companies listed above. As such, it has a lower overall total shareholder yield of just 5%.

This is just a starting point for further research of these companies. Research shows that many companies waste shareholder capital by repurchasing shares at elevated levels.

These businesses might have fallen into the same trap. It could be worth taking a closer look at the companies to determine whether or not managements' capital allocation policies are sensible considering other capital requirements and debt levels.

There's never a one-size-fits-all framework for analyzing businesses, and blindly following recommendations can often lead to losses. However, that does not mean that these are bad investments. Further research could identify them as attractive holdings for the long run.

Disclosure: The author owns no share mentioned.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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