Sometimes the best investment a company can make is to buy its own shares.
First American Financial Corp., the Santa Ana-based parent of one of the nation's largest title insurance companies, did just that last week when it bought back 18% of its outstanding common stock in a transaction valued at $33.9 million, including $29.4 million in cash.
The company paid a hefty premium for the shares--the equivalent of $33.91 a share for stock that closed in over-the-counter market trading that day at $26. Still, shareholders seemed to like the move. By week's end, First American shares had climbed $3.50 to close at $29.50
Company officials said they considered the acquisition a bargain, and analysts speculated that the move could help push First American stock to $35 a share, or higher, this year.
"We think we got a hell of a buy," said Jack Derloshon, chief financial officer. "We considered the opportunity to repurchase nearly 1 million shares unique, (and) we felt obliged" to snap them up, he said.
First American, despite racking up three consecutive record annual profits and paying dividends every year since 1909, is way undervalued by the market, Derloshon said. The company's shares trade at less than six times annual earnings of about $5 per share--or just about half the rate at which other title insurance company stocks sell.
By reducing the number of shares outstanding, First American executives hope to improve that ratio.
The purchase of 997,756 shares from American Century Corp. in San Antonio should improve the earnings per share by almost 18% because First American must retire that stock.
The repurchase also sends a message to Wall Street that company officials are convinced that the company's shares are undervalued.
And there's another benefit to repurchasing shares: "We didn't want to be bait for a hungry shark," Derloshon said. While the big block of stock held by American Century was considered to be in friendly hands, there was concern that another purchaser could emerge to buy the shares and mount an effort to gain control of First American.
"It's a good use of the company's funds," said Thomas Kearns, a securities analyst with Merrill Lynch & Co. in New York, who is recommending the stock.
Kearns said it will be difficult for First American to beat last year's record profits of $27.3 million, "but they should come close."