If you are a long-term investor, it usually provides opportunity than hardship when an investment you own is undervalued—i.e. selling for less than it is properly worth. If a business is worth $70 per share and yet it trades for $50 per share, there are two levels that can be pulled on behalf of shareholders to create value.
First, the management team could repurchase some of the company’s stock, which assuming the estimates of the business’ value are accurate, results in the creation of a 28% return as long as that status quo differential persists. And secondly, the management team can declare a dividend, which the shareholder can then choose to reinvest into more ownership shares that are trading at the projected 28% discount. This type of perpetual undervaluation is a not insignificant portion of the long-term wealth that owners in the old Abbott Labs, Philip Morris, and Standard Oil … Read the rest of this article!