Money

A Long-Term Share Buyback Play (With Double Upside Potential)

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Stock market declines like our current one can be wonderful opportunities to build our portfolios.

We can buy more shares of great companies at even better prices.

And all the while, these companies themselves can also use stock market sell-offs to their advantage.

Companies with excess cash can add incredible value to their shareholders’ portfolios by buying back their stock when it’s significantly undervalued.

In December 2021, I introduced you to Brighthouse Financial (Nasdaq: BHF).

We have done all right with Brighthouse shares since then, with the company’s stock holding up much better than the overall market.

Chart: Brighthouse Financial Has Outperformed Year to Date

But like most companies’ shares, Brighthouse’s shares have cheapened over the past several months.

My specific reason for writing about Brighthouse in December 2021 was the company was intelligently utilizing share buybacks.

Brighthouse is one of the largest providers of life insurance and annuities in the United States.

Brighthouse was spun off from the much larger MetLife (NYSE: MET) in August 2017.

As frequently happens when a smaller company is spun off from a parent company, shares of Brighthouse were sold off hard by institutional investors who receive them.

Brighthouse shares tanked immediately after the spinoff and still haven’t recovered.

Today, Brighthouse trades at a comically low 0.27 times book value.

Chart: Brighthouse Financial's Price-to-Book Value

Book value is the value of a company’s total net assets.

Insurance companies generally trade at one times book value or slightly above.

With Brighthouse now trading at 0.27 times book value, this off-the-radar company’s shares are trading for $0.27 on the dollar.

The stock market has given Brighthouse a lemon when it comes to valuation.

However, Brighthouse’s board of directors has chosen to make some delicious lemonade…

Rather than getting frustrated by the rock-bottom valuation, Brighthouse’s board of directors continues to exploit it.

From the start of 2018 through today, Brighthouse has reduced its total share count from 120 million to less than 75 million.

In doing so, it has reduced total shares outstanding by more than a third.

Chart: Brighthouse Financial Total Shares Outstanding

By steadily buying back shares at such a huge discount, Brighthouse is increasing value per share for remaining shareholders.

You can see below how much annualized book value per share has grown as a result of Brighthouse’s savvy share buyback campaign.

Chart: Brighthouse Financial's Book Value (Annual Per Share)

In 2018, a share of Brighthouse was worth $125 of the company’s net assets.

A single share is now worth $207 in 2022 thanks to the buyback program.

The Bargain Has Sweetened

Brighthouse shares remain dirt cheap, and the company continues to repurchase them with excess cash.

In the first quarter of 2022, Brighthouse bought back another $127 million worth of shares. And it repurchased another $53 million worth from the start of second quarter of 2022 through early May.

Meanwhile, the company’s earnings prospects have improved.

Like all insurance companies, Brighthouse has suffered for years under rock-bottom interest rates.

Insurance companies hold massive fixed-income investment portfolios, so low rates mean low interest revenue.

Rates are now moving higher. That’s huge news for Brighthouse.

Considering how much interest rates had increased through the end of March, investment earnings over the next five years for Brighthouse are now projected to increase by $2 billion.

With 75 million common shares outstanding, that extra $2 billion in interest revenue equates to an extra $26 per share in earnings.

Considering that Brighthouse currently trades for around $48 per share, that’s a huge piece of good news.

I’m sure that Brighthouse shareholders are frustrated with how low the company’s stock price still is.

But the truth is that the longer Brighthouse shares continue to trade at this incredible discount, the better it is for investors who intend to hold for the long term.

The more shares that Brighthouse can repurchase at these deeply discounted prices, the more valuable each of the remaining shares becomes.

Eventually, the share price will move toward the true net asset value of these shares, which is multiples of the current share price.

Either that or the company forces the realization of full value by selling itself to a buyer at a fair price.

Those are both great outcomes in my book.

Good investing,

Jody

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