Armed with a pile of cash and improving financial results, Fairfax Financial Holdings Ltd. founder and chief executive officer Prem Watsa told shareholders that the best times for the company are still ahead.
At the insurance and investment company’s annual meeting in Toronto on Thursday, Mr. Watsa stressed Fairfax’s potential to improve shareholder returns over the next decade. But the strategy’s not to be rushed. “There’s no quick profit at Fairfax,” he told a packed concert hall of shareholders.
Fairfax spent 2017 pursuing growth after years of investing conservatively amid macroeconomic fears. The results were mixed, with gains from the sales of two large insurance businesses somewhat offset by a surge in hurricanes and other natural disasters that cost US$1.3-billion.
In recent years, Fairfax’s annual meetings have featured bold pronouncements from Mr. Watsa about a long list of potential instabilities in global markets, including deflation, debt levels and bubble conditions in housing and technology. These concerns underpinned the company’s decision to extensively hedge its equity portfolio during a period of time when many global stock markets climbed.
Thursday’s meeting was decidedly more inward looking, with Mr. Watsa saying the next decade of the company would be focused on smaller acquisitions, the steady expansion of its portfolio companies and improved returns for shareholders.
When Fairfax was founded in 1985 the company issued five million shares, and as of 2017 the business had 27.8 million shares outstanding as additional stock was issued over time to fund what Mr. Watsa has tallied up to be just shy of 50 acquisitions over 32 years.
Mr. Watsa said that the periodic dilution is at an end. “We don’t see shares being issued, because our company is going to be strong. We see the shares repurchased to be increasing over time.”
Mr. Watsa said that this didn’t rule out further insurance acquisitions – particularly small, bolt-on acquisitions in different parts of the world – but that the focus for the next decade or more would be to buy back its stock as a way to return capital to shareholders.
While Fairfax may be back on the offensive, Mr. Watsa maintains that Fairfax isn’t really changing its philosophy. It’s still a value investor that seeks to buy companies at rock-bottom prices.
He’s also become interested in the idea of repatriating the Canadian units of struggling American businesses. The company’s recent deal to acquire the profitable and relatively independent division of beleaguered U.S. retailer Toys “R” Us Inc. as one example. The company thinks that the real estate Toys “R” Us owns might be worth almost as much as they paid for the business. Another was the acquisition of Golf Town from its struggling U.S. parent.
Fairfax is looking hard at its mix of stocks and private market investments in an effort to help the company earn a target 7-per-cent annual return on its $40-billion investment portfolio. Right now, half of the company’s insurance portfolios are held in cash and short-term investments. Another 22 per cent is in common stocks.
Mr. Watsa said that he’s been asked by shareholders about how to get Fairfax’s stock moving up. He said that the company’s book value per share, a ratio that measures equity available to common shareholders, typically moves in step with the stock.
While book value per share has risen 19.5 per cent annually since 1985, excluding the dividend, it has been essentially flat over the past five years. “We’re now focused on growing that,” Mr. Watsa said, adding that the company’s objective is to get to 15-per-cent growth.