2017 Annual Letter

[Dazel]

Value2...short it...hopefully the price drops for you.
Gotta love the stock market.

[ourkid8]

They are authorized to repurchase 2,672,504 (Daily limit of 15,318) common shares. At the current market price, that's around C$1.7B.

 They have also entered into an automatic share purchase plan with a designated broker to allow for the purchase of its Subordinate Voting Shares under the NCIB at times when Fairfax normally would not be active in the market due to applicable regulatory restrictions or internal trading black-out periods. (Second link)

http://www.fairfax.ca/news/press-releases/press-release-details/2017/Intention-to-Make-a-Normal-Course-Issuer-Bid-for-Subordinate-Voting-Shares-and-Preferred-Shares/default.aspx
http://www.fairfax.ca/news/press-releases/press-release-details/2017/Fairfax-Enters-Into-Automatic-Share-Purchase-Plan/default.aspx

On the topic of sharebuybacks, I have all the letters, so I searched over the whole period for buyback/repurchases (similar to ourkid over last 10 years).  Here's what I found:

From 1988-1992 they repurchased 34% of outstanding shares.  Discussion of this buyback happened afterwards mostly.

Mentioned buybacks again in 1996/7, first mention of Singleton.  Did not emphasize they would do it, just that they would consider it first.

In 1999-2000, they talked about repurchase similar to 1988-1992 period.  Looks like they repurchased ~1,000,000 shares.  Then had to issue shares to 2005 due to the well-known issues.

Repurchased 1,000,000 shares in 2008.

In 2010, they said "Please do not think we have forgotten about common stock buybacks. We have historically purchased significant amounts of our stock, but have recently chosen instead to buy some excellent companies which became available and that we think will create significant intrinsic value in the future."

Then in 2016 buybacks were mentioned and in 2017, there was a strong emphasis on buybacks that we all read.

So, outside of 1999/2000 it doesn't seem like they overpromised and underdelivered on share buybacks given what they said.

So, if I've understood you correctly, your money is on repurchases rather than acquisitions?  I'm clearly on the other side as Prem always seems to find a target that he finds attractive.To buy back say $1b of shares, the normal course issuer bid hardly seems adequate.  I guess we'll see whether there's a tender offer.   Time will tell



SJ

[Spekulatius]

If the thesis plays out and FFH shows 15% book value growth or anything close to it for a couple of years, there won’t be any buybacks because most likely the P/B will be too high to warrant buybacks. In the end it will be the organic book growth that determines if the investment  thesis works, not buybacks.

[StubbleJumper]

They are authorized to repurchase 2,672,504 (Daily limit of 15,318) common shares. At the current market price, that's around C$1.7B.

 They have also entered into an automatic share purchase plan with a designated broker to allow for the purchase of its Subordinate Voting Shares under the NCIB at times when Fairfax normally would not be active in the market due to applicable regulatory restrictions or internal trading black-out periods. (Second link)

http://www.fairfax.ca/news/press-releases/press-release-details/2017/Intention-to-Make-a-Normal-Course-Issuer-Bid-for-Subordinate-Voting-Shares-and-Preferred-Shares/default.aspx
http://www.fairfax.ca/news/press-releases/press-release-details/2017/Fairfax-Enters-Into-Automatic-Share-Purchase-Plan/default.aspx

On the topic of sharebuybacks, I have all the letters, so I searched over the whole period for buyback/repurchases (similar to ourkid over last 10 years).  Here's what I found:

From 1988-1992 they repurchased 34% of outstanding shares.  Discussion of this buyback happened afterwards mostly.

Mentioned buybacks again in 1996/7, first mention of Singleton.  Did not emphasize they would do it, just that they would consider it first.

In 1999-2000, they talked about repurchase similar to 1988-1992 period.  Looks like they repurchased ~1,000,000 shares.  Then had to issue shares to 2005 due to the well-known issues.

Repurchased 1,000,000 shares in 2008.

In 2010, they said "Please do not think we have forgotten about common stock buybacks. We have historically purchased significant amounts of our stock, but have recently chosen instead to buy some excellent companies which became available and that we think will create significant intrinsic value in the future."

Then in 2016 buybacks were mentioned and in 2017, there was a strong emphasis on buybacks that we all read.

So, outside of 1999/2000 it doesn't seem like they overpromised and underdelivered on share buybacks given what they said.

So, if I've understood you correctly, your money is on repurchases rather than acquisitions?  I'm clearly on the other side as Prem always seems to find a target that he finds attractive.To buy back say $1b of shares, the normal course issuer bid hardly seems adequate.  I guess we'll see whether there's a tender offer.   Time will tell



SJ

Yes, I saw those pressers too.  But, it strikes me as a wee bit impractical to absorb a quarter of the daily volume over almost a whole year to buy back $1b of shares.  The price would likely end up moving enough that you might need to rethink the magnitude of that kind of buying programme.  For that kind of large buyback, a reverse auction tender offer capped at say 1.1 or 1.15x bv (ie, us$550 or a shade higher) seems to me a more realistic way of actually getting that many shares at a price that FFH might actually be prepared to pay.


SJ

[petec]

The buyback history might also suggest it will be opportunistic. There is a very high chance of a material market selloff in the timeframe we are discussing (5-10y). That's when I'd expect to see material activity. Otherwise it will be an FCF-driven slow burn.

[Cardboard]

If they want to buyback shares in large quantity without a tender offer, they can buy from a single seller within 5% of market price for any quantity. That is an allowed exemption.

There are funds that do liquidate, change in mandate, etc.

Cardboard

[racemize]

On the topic of sharebuybacks, I have all the letters, so I searched over the whole period for buyback/repurchases (similar to ourkid over last 10 years).  Here's what I found:

From 1988-1992 they repurchased 34% of outstanding shares.  Discussion of this buyback happened afterwards mostly.

Mentioned buybacks again in 1996/7, first mention of Singleton.  Did not emphasize they would do it, just that they would consider it first.

In 1999-2000, they talked about repurchase similar to 1988-1992 period.  Looks like they repurchased ~1,000,000 shares.  Then had to issue shares to 2005 due to the well-known issues.

Repurchased 1,000,000 shares in 2008.

In 2010, they said "Please do not think we have forgotten about common stock buybacks. We have historically purchased significant amounts of our stock, but have recently chosen instead to buy some excellent companies which became available and that we think will create significant intrinsic value in the future."

Then in 2016 buybacks were mentioned and in 2017, there was a strong emphasis on buybacks that we all read.

So, outside of 1999/2000 it doesn't seem like they overpromised and underdelivered on share buybacks given what they said.

So, if I've understood you correctly, your money is on repurchases rather than acquisitions?  I'm clearly on the other side as Prem always seems to find a target that he finds attractive.To buy back say $1b of shares, the normal course issuer bid hardly seems adequate.  I guess we'll see whether there's a tender offer.   Time will tell



SJ

Mostly, it seemed you were making a few assertions about how often FFH has talked about buybacks and whether they followed through, so I wanted to see if that was accurate or not.  It seems to me they haven't talked a big game and not followed through before, as you suggested.

[StubbleJumper]

On the topic of sharebuybacks, I have all the letters, so I searched over the whole period for buyback/repurchases (similar to ourkid over last 10 years).  Here's what I found:

From 1988-1992 they repurchased 34% of outstanding shares.  Discussion of this buyback happened afterwards mostly.

Mentioned buybacks again in 1996/7, first mention of Singleton.  Did not emphasize they would do it, just that they would consider it first.

In 1999-2000, they talked about repurchase similar to 1988-1992 period.  Looks like they repurchased ~1,000,000 shares.  Then had to issue shares to 2005 due to the well-known issues.

Repurchased 1,000,000 shares in 2008.

In 2010, they said "Please do not think we have forgotten about common stock buybacks. We have historically purchased significant amounts of our stock, but have recently chosen instead to buy some excellent companies which became available and that we think will create significant intrinsic value in the future."

Then in 2016 buybacks were mentioned and in 2017, there was a strong emphasis on buybacks that we all read.

So, outside of 1999/2000 it doesn't seem like they overpromised and underdelivered on share buybacks given what they said.

So, if I've understood you correctly, your money is on repurchases rather than acquisitions?  I'm clearly on the other side as Prem always seems to find a target that he finds attractive.To buy back say $1b of shares, the normal course issuer bid hardly seems adequate.  I guess we'll see whether there's a tender offer.   Time will tell



SJ

Mostly, it seemed you were making a few assertions about how often FFH has talked about buybacks and whether they followed through, so I wanted to see if that was accurate or not.  It seems to me they haven't talked a big game and not followed through before, as you suggested.

With respect, you've looked at the sharecount over the past 20 years, right?  Do those numbers suggest to you that buybacks have truly been a goal, or do those numbers suggest to you that acquisitions have truly been a goal?  So, yes Prem has talked about buybacks on several occasions and the sharecount keeps trending up.

With that observation, I take his comments about Teledyne with a hefty dose of salt.  As I said, my money is on more acquisitions rather than buybacks.  And, as I noted, this isn't necessarily a bad thing.  If your own shares aren't the best use of your cash, then don't buy them.  Allocate cash to the best opportunity available.

Finally, if the world does evolve as Prem has suggested, in the short term a good chunk of the $2.5b cash held in the holdco could be used for a buyback.  I've thrown out the round number of a Bil, but it wouldn't be outrageous to bump that to $1.5 Bil which would still leave a respectable holdco cash balance.  For that kind of magnitude there's a practical decision to be made about the vehicle.  The normal course issuer bid is a boiler plate filing every year, but it could actually be used in this case.  I just think a tender might work better for the potential volumes that I've posited.  On the other hand, if it's just us$400m or something, the normal course issuer bid would probably work fine.


SJ

[racemize]

Mostly, it seemed you were making a few assertions about how often FFH has talked about buybacks and whether they followed through, so I wanted to see if that was accurate or not.  It seems to me they haven't talked a big game and not followed through before, as you suggested.

With respect, you've looked at the sharecount over the past 20 years, right?  Do those numbers suggest to you that buybacks have truly been a goal, or do those numbers suggest to do that acquisitions have truly been a goal?  So, yes Prem has talked about buybacks on several occasions and the sharecount keeps trending up.

With that observation, I take his comments about Teledyne with a hefty dose of salt.  As I said, my money is on more acquisitions rather than buybacks.  And, as I noted, this isn't necessarily a bad thing.  If your own shares aren't the best use of your cash, then don't buy them.  Allocate cash to the best opportunity available.

Finally, if the world does evolve as Prem has suggested, in the short term a good chunk of the $2.5b cash held in the holdco could be used for a buyback.  I've thrown out the round number of a Bil, but it wouldn't be outrageous to bump that to $1.5 Bil which would still leave a respectable holdco cash balance.  For that kind of magnitude there's a practical decision to be made about the vehicle.  The normal course issuer bid is a boiler plate filing every year, but it could actually be used in this case.  I just think a tender might work better for the potential volumes that I've posited.  On the other hand, if it's just us$400m or something, the normal course issuer bid would probably work fine.


SJ

Just to be really clear what we're talking about here.  You said this:

Prem talking about buybacks is a bit like a teenager talking about sex.  They both engage the subject with a great deal of enthusiasm, but when the rubber hits the road (or something!), they don’t actually do it anywhere near as often or as successfully as their optimistic plans would suggest.  Working from memory, Prem has made enthusiastic references to buybacks in about half of the annual letters -- on some occasions promising to go on offence while on other occasions trying to contextualize a share issuance.

He didn't talk about it anywhere close to 50% of the letters.  He didn't promise a bunch of buybacks like he is now and not follow through as you suggested.  That's all I was addressing as it didn't sound right to me.  I'm not making any assertions other than to address specifically what you asserted with the facts of what he said in the letters.


Moreover, I didn't say he didn't issue shares--he did.  I'm saying he didn't before say "we are done with buying companies and are going to start reducing sharecount".  In fact, as I quoted, in 2010, he said "Please do not think we have forgotten about common stock buybacks. We have historically purchased significant amounts of our stock, but have recently chosen instead to buy some excellent companies which became available and that we think will create significant intrinsic value in the future."  So, to me, it seems pretty clear that he talked about acquisitions and then made some.  Now he's saying those are no longer necessary, and he's talking about buying back shares.  This all seems reasonable to me and does not show a pattern of talking one way and doing another with respect to share buybacks.

[StubbleJumper]

Mostly, it seemed you were making a few assertions about how often FFH has talked about buybacks and whether they followed through, so I wanted to see if that was accurate or not.  It seems to me they haven't talked a big game and not followed through before, as you suggested.

With respect, you've looked at the sharecount over the past 20 years, right?  Do those numbers suggest to you that buybacks have truly been a goal, or do those numbers suggest to do that acquisitions have truly been a goal?  So, yes Prem has talked about buybacks on several occasions and the sharecount keeps trending up.

With that observation, I take his comments about Teledyne with a hefty dose of salt.  As I said, my money is on more acquisitions rather than buybacks.  And, as I noted, this isn't necessarily a bad thing.  If your own shares aren't the best use of your cash, then don't buy them.  Allocate cash to the best opportunity available.

Finally, if the world does evolve as Prem has suggested, in the short term a good chunk of the $2.5b cash held in the holdco could be used for a buyback.  I've thrown out the round number of a Bil, but it wouldn't be outrageous to bump that to $1.5 Bil which would still leave a respectable holdco cash balance.  For that kind of magnitude there's a practical decision to be made about the vehicle.  The normal course issuer bid is a boiler plate filing every year, but it could actually be used in this case.  I just think a tender might work better for the potential volumes that I've posited.  On the other hand, if it's just us$400m or something, the normal course issuer bid would probably work fine.


SJ

Just to be really clear what we're talking about here.  You said this:

Prem talking about buybacks is a bit like a teenager talking about sex.  They both engage the subject with a great deal of enthusiasm, but when the rubber hits the road (or something!), they don’t actually do it anywhere near as often or as successfully as their optimistic plans would suggest.  Working from memory, Prem has made enthusiastic references to buybacks in about half of the annual letters -- on some occasions promising to go on offence while on other occasions trying to contextualize a share issuance.

He didn't talk about it anywhere close to 50% of the letters.  He didn't promise a bunch of buybacks like he is now and not follow through as you suggested.  That's all I was addressing as it didn't sound right to me.  I'm not making any assertions other than to address specifically what you asserted with the facts of what he said in the letters.


Moreover, I didn't say he didn't issue shares--he did.  I'm saying he didn't before say "we are done with buying companies and are going to start reducing sharecount".  In fact, as I quoted, in 2010, he said "Please do not think we have forgotten about common stock buybacks. We have historically purchased significant amounts of our stock, but have recently chosen instead to buy some excellent companies which became available and that we think will create significant intrinsic value in the future."  So, to me, it seems pretty clear that he talked about acquisitions and then made some.  Now he's saying those are no longer necessary, and he's talking about buying back shares.  This all seems reasonable to me and does not show a pattern of talking one way and doing another with respect to share buybacks.

You seem seized upon my intro that, working from memory, buybacks were mentioned in about half the letters.  That's the danger of working from memory of course, but I am away from my office for two months in some interesting, but rural places.  I cannot peruse 20 years of letters, so rough recollection, as good or poor as it is, must do.

The broad message, however, doesn't change.  I fully expect the serial acquisitions to continue, and I fully expect a higher sharecount five years from today.  And, that's not necessarily a bad thing.  There'll be buybacks just as there are small repurchases every year, but I'm not holding my breath for a Teledyne model, because that's just not Prem's style.


Cheers

SJ