As one of the world's most talented stock pickers, Markel (NYSE:MKL) CIO and co-CEO Tom Gayner has built a portfolio that helped his company consistently trounce the broader market's returns for decades. Of course, the financial holding company and so-called mini-Berkshire Hathaway can also thank its acquired businesses (operating under Markel Ventures) and its specialty insurance segment for helping it weather market downturns and further fuel its comprehensive gains.
But even with this three-tiered approach maximizing its returns, sometimes the best use of Markel's capital is to simply buy back its own stock -- at least, provided it trades at a big enough discount to its true value. And Markel might be gearing up to do exactly that.
According to a Securities and Exchange Commission filing from the company late last month, Markel's board recently approved a new $300 million share repurchase authorization.
Perspective is in order
To be fair, this doesn't guarantee Markel will take advantage of the full authorization. The new buyback program technically has no expiration, and replaces a similar previous program, approved in May 2018, through which Markel repurchased and retired $98 million of its common stock.
What's more, stock repurchases are near the bottom of Markel's priority list when seeking to allocate capital.
During last quarter's conference call on July 31, Gayner elaborated (emphasis mine):
As we've discussed for many years, our rank order and allocating capital is first to invest in and support our existing businesses when we have reinvestment opportunities to help them achieve profitable growth. Second, we look for acquisitions that add to our existing businesses or create new fields for us to plan. Third, we build our portfolio of publicly traded equity securities. And fourth, when appropriate, we repurchase Markel stock. We did all four of these in the first half of 2019.
In fact, the bulk of Markel's repurchase activity under its last authorization occurred in the first half of 2019, when the company bought back 68,000 shares of stock for a total of $69.3 million -- or an average cost of roughly $1,019 per share -- with a little under $32 million of that total coming in the second quarter. That cost basis is unsurprisingly near the lower end of Markel's 2019 share-price range of roughly $950 to $1,170.
But more interesting to investors should be the price to book value at which Gayner completed those repurchases. For perspective, here's how Markel's share price and price to book value has fluctuated so far this year:
In the past, Warren Buffett had told Berkshire Hathaway shareholders he would only be willing to buy back their stock if it traded at or below 1.2 times book value -- an incredibly attractive, if rare, opportunity any investor would do well to seize.
Gayner hasn't provided such specific guidance on his views for pulling the buyback trigger on Markel stock. But with its book value per share standing at just under $752 at the end of the second quarter, the consolidated cost basis of Markel's latest repurchases stands at an almost as attractive 1.36 times today's book value -- though depending on their timing, the metric could have been as high as 1.64 in the first quarter, when Markel put its older repurchase authorization to use, perhaps knowing an impending bump was likely on the way.
That said, as broader macroeconomic uncertainty remains, it's certainly more difficult for Markel Ventures to find attractive acquisition candidates. As the broader markets have soared to near record highs, it's also undoubtedly harder for Gayner to find other publicly traded equities that meet his stringent requirements as a renowned value investor. So, while Markel investors can rest assured the company is willing and ready to generate value however its talented capital allocators see fit, its freshly renewed repurchase plan may prove to be the most effective avenue to do exactly that.