VALUE: After Hours (S08 E10): Assured Guaranty (AGO): A 20-Year Compounder Still Trading Cheap

During their recent episode Tobias Carlisle and Tim Travis discussed Assured Guaranty (AGO): A 20-Year Compounder Still Trading Cheap. Here’s an excerpt from the episode:

[Tobias] While I’ve got you, one stock we have to talk about is Assured Guarantee, AGO. That’s one that I know you’ve been tracking for at least a decade, more than a decade, because we’ve been talking about this since 2016.

[Tim] Oh, yeah. I think I started investing in it maybe the end of 2008 or beginning of 2009. It’s almost been a 20-year journey there.

That’s another case of just phenomenal management. You have a bond insurance company. They’re the number one bond insurer in the world.

Not a great business. It’s not an amazing business by any stretch of the imagination. It’s decent, but demand hasn’t been tremendous.

They benefit more in a higher rate environment for their investment portfolio, but lower rates, you get more bond issuance. It’s just not been a great environment. But what management has done- It’s got terrible headline risk.

[Tobias] Terrible headline risk.

[Tim] You had Puerto Rico, you had CDOs during the financial crisis, you had all this stuff.

[Tobias] Anytime there’s some big financial crisis blow up there in the paper is being somehow- They’re not in private capital yet.

[Tim] I haven’t heard them named in that yet. But what’s so good is they have a great CEO, Dominic Federico, who’s been with the company since they IPO-ed in 2004, 2005, or even before that, but he’s been the CEO. He’s bought back stocks.

They buy back about $500 million of common stock each year on average, I think over the last seven years. Their current market cap is something like $3.7 billion. They’re retiring 12% to 13% of their shares each year.

Every single dollar of these stock buybacks over the last decade has been at a large discount to their book values and adjusted book values. Right now, the stock’s trading at something like 45% their adjusted book value, 66% of their book value. It’s really cheap.

If you look at the actual portfolio, the troublesome credits are kind of like water utilities in the UK, for instance. Even with Puerto Rico, the water company paid its debt. The UK is a very sophisticated economy.

They’re doing all right. Just like I talked about with the BDCs, if you’re buying back your stock at 66% of net asset value, you can make up for some of these added credit losses in the future. Good capital management can really reduce some of those mistakes on the underwriting side as well.

I do think it’s a buy at these levels. I actually bought some today, just because I think the valuation is cheap enough where you can.

[Tobias] They publish these figures too. Adjusted book value and adjusted book value are figures that they publish in their reports. You can track those numbers and you can see how they’ve done.

[Tim] The growth has been extraordinary. You’ve got to look at it. It’s so interesting to see.

There are very few insurance companies that have grown their book value like AGO has, but AGO has a way lower return on equity than some of the other ones that would come up in that type of screen. It’s not the best business in the world, but I would say he’s as good of a capital allocator as any other. He’s got that kind of bulldog personality where it’s like, screw it.

If you’re going to give me my stock at this price, I’m just going to buy it back. He does it consistently. I give him a lot of credit for that.

I think that’s so rare. How much of the business does he own? I don’t think a tonne, because he’s getting older.

He has bought at times, but he’s in that systematic offload. They do pay a decent amount in compensation to their management team. Overall, I think he’s done really well.

It’s one of those where it’s like, look, it might not be the best company in the world, just like Citigroup, but if you’re buying at the right valuation, it’s super attractive. Once again, I’m not Mr. BDC. I didn’t own any of these things for a long time, but if you’re buying them at 20 to 35% discounts to the liquidation value of their loan portfolios, a lot has to go wrong before you lose money if you’re a long-term investor.

[Tobias] I think I heard him say once that he wanted to be the last shareholder. He was going to have the last share.

[Tim] Yes. I used to talk to him, and we’d joke about that. Absolutely.

Maybe he told me. Yeah, yeah, probably did. I love that attitude.

It’s like, that’s fine. We know what the value of the company is, and so we’re going to keep doing that.

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

VALUE: After Hours (S08 E10): Assured Guaranty (AGO): A 20-Year Compounder Still Trading Cheap

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