In a bid to curry favor with investors, some companies overhype seemingly trivial business developments. The daily business newswires are laden with contract announcements that will likely have almost no effect on a company’s financial statements.#-ad_banner-#​

Yet other companies prefer the opposite approach: tucking major news announcements deep in a press release for only the most patient readers to notice.

Buried beneath the recent quarterly financial figures released by municipal bond insurer Assured Guaranty Ltd. (NYSE: AGO), you’ll find this small item: “In November 2013, AGL became tax resident in the United Kingdom … As a U.K. tax resident, AGL will be subject to the tax rules applicable to companies resident in the U.K., including the benefits afforded by the U.K.’s tax treaties. AGL expects that, as a result of it becoming a U.K. tax resident, it will be able to more efficiently manage capital within the Assured Guaranty group.”

This is precisely the kind of move that shareholders have been clamoring for. Before making this change, many investors knew that AGO traded too far below book value, but tax regulations made it hard for the company to take full advantage. Sure, the company has bought back $315 million in stock this year (and buying back stock at below book value prices is a no-brainer), but analysts suspected that Assured Guaranty’s buybacks would be much bigger were it not for tax repatriation issues.

Now, the company is free to pursue potentially massive share buybacks. Shifting its tax status to the U.K. means that “AGO materially improved its liquidity (and stock buyback capacity) through the holding company,” writes UBS’ Brian Meredith, who rates shares a “buy” and sees them rising from a recent $22.50 to $30. The analyst now thinks this bond insurer is on pace to buy back an additional $534 million in stock by the end of 2014, and another $300 million in 2015. 

Other analysts agree. MKM Partners’ Harry Fong believes Assured Guaranty “offers investors a compelling value story and still consider the name to be our best idea.” His $35 price target is roughly 55% above current levels. 

Mark Palmer, who follows Assured Guaranty for BTIG, is even more bullish. Shifting its geography to the U.K. is “a game-changer for AGO insofar as it will enable the company to transform the significant excess capital it already has at its operating subsidies, plus the capital it stands to free up through refundings and the roll-off of (residential mortgage-backed securities) exposures, into share buybacks.”

And while other analysts are talking about further buybacks in the hundreds of millions, Palmer thinks Assured Guaranty “is positioned to return as much as $2 billion in capital to shareholders over the next few years, or more than half of its current market capitalization.” That logic underpins his $37 price target.

Muni Defaults
This would seem to be an odd time to be talking up the prospects of a municipal bond insurer. Cities like Detroit and Stockton, Calif., have declared bankruptcy, seemingly affirming the alarmist predictions of Meredith Whitney. Back in July, she told Yahoo Finance that the Detroit bankruptcy filings will “deliver ‘staggering aftershocks’ for the muni bond market.”

But we’ve known for some time that Detroit’s finances have been deeply stressed, and a bankruptcy filing was seen as inevitable. Since Whitney’s prediction last summer, the municipal bond market has actually been quite stable. That’s a welcome development for Assured Guaranty, which has been trying to assure investors for half a decade that its financial results wouldn’t deeply suffer in the face of municipal financial stresses. The company is on track to earn roughly $3 a share in 2013 and 2014, just as was the case in 2012. 

Yet the key metric here is operating book value per share, which marches ever higher, thanks in part to a shrinking share count. That figure rose from $28.54 at the end of 2011 to a projected $33.27 by the end of this year. 

If you add in the company’s unearned premium reserves, which have been off-limits to the company prior to the tax change, then the math gets really interesting. Assured Guaranty’s adjusted book value per share, which takes these reserves into account, now stands close to $50 a share. With this stock recently trading at $22.50, you can understand why analysts are thrilled at the tax changes, which will help to free up this locked-up balance sheet asset. 

Risks to Consider: The biggest risk for AGO is an acceleration in municipal bond defaults, though it seems that most state and local governments have already passed the point of deep financial distress and are on the mend. 

Action to Take –> Whenever you hear about share buybacks, check out the company’s book value. Every year, you’ll come across companies that are trading well below book and buying back stock, which makes them among the safest stocks on the market.

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