Let’s cut to the chase.
For this year’s letter, instead of comprehensively reviewing 2016, we thought we’d start by addressing the two questions we have heard most often from shareholders lately:
The answers to these questions illustrate our fundamental approach to creating long-term shareholder value, and the ways in which we allocate capital to achieve that goal.
In 2016 we purchased 3.4 million shares of Loews stock, or about 1% of our outstanding shares, at an average price of just under $39 per share. About 2.6 million of those shares were repurchased during the first half of the year. As the equity markets climbed to record heights during the second half of 2016, and Loews’s common stock moved along with them, we chose to exercise caution. In hindsight, we could have repurchased more of our shares early in the year, when Loews stock was trading at lower prices and the S&P 500 was well below its recent levels. Alas, it must be time to get a new crystal ball!
Unlike some companies, we do not repurchase our stock robotically or set annual repurchase quotas. Rather, we seek to buy back our stock when it’s below our estimation of its intrinsic value and when prevailing market conditions seem conducive. While we remain positive on our shares and see great potential for our subsidiaries, we did not see the wisdom of buying back shares in an exuberant equity market. We are more comfortable buying back our shares when the market is not hitting new highs. Over the span of time, measured in years and decades, we are proud of our record and we feel that our share repurchases have created significant value for our shareholders.
As for the second question, we continue to kick tires on potential acquisitions, looking for the right acquisition at the right price. Valuations in the merger market have made our search difficult and frustrating. The merger market today is being driven by large numbers of corporate buyers, as well as by private equity funds which are under pressure to put their capital to work. The abundance of private capital combined with the amount of leverage available at remarkably low rates has enabled private equity firms to pay generous prices for companies that haven’t already been gobbled up by strategic buyers.
Our focus drives us to invest only when all the pieces of a transaction — from valuation, to potential cash flow, to future industry dynamics — add up to a solid investment. To date, we have not found a potential acquisition where all the pieces fit together the way we believe they should. It’s a tough market in which to be a disciplined buyer.
That said, our liquidity gives us tremendous strategic and financial flexibility. We will never stop using our best judgment to balance risk and reward to build value for all shareholders. And we are confident that, despite today’s market exuberance, we will find desirable opportunities in the future.
Loews’s assets currently consist of three publicly-traded subsidiaries: CNA Financial, Diamond Offshore Drilling, and Boardwalk Pipeline Partners; and Loews Hotels, a wholly owned subsidiary; as well as a large portfolio of cash and investments.
Our unique structure gives us the freedom to make investments and acquisitions across a broad spectrum of industries, wherever we see opportunity.