Examples of actual bargain hunting might be useful for people seeing a new barrage of garbage headlines predicting recession, depression, the bottom being in, the fed raising rates, the fed pivoting, deflation worries turning into inflation worries, gas prices being too high causing a recession, oil prices being too low causing a recession, or Jay Powell doing a 540 kick flip while Tony Hawk is cheering from the sidelines.

So here's one that just happened recently, with new developments this morning…

Part 1: The setup

Saga Communications (SGA), a radio broadcaster headquartered out of Gross Pointe (Detroit suburbs), just today declared a 2nd special dividend and a new variable dividend policy moving forward. But how did we get here?

The founder died.

SGA was a controlled company, with a dual-class share structure. Edward Christian, who had been there since the start (1986) and of course the 1992 IPO, owned the Class B shares with 10x voting power and otherwise identical rights. So, despite not owning anywhere near 51%, he controlled the company.

In the covenants was stated that upon the passing of an owner of Class B shares, the shares would automatically revert to Class A shares (1:1) as they pass on to the inheritence of Ed's choosing, with all the dividend and voting rights concurrent with an A share.

In other words, when Ed passed the controlled company is no longer controlled. Now I (and I doubt anyone else) had any idea this was going to happen. I only knew it was not an unreasonable possibility, as he was 78 yrs old, and understood what would happen in that event by reading. The DEF14A gives a quick overview of executive compensation, change of control events, and the like.

As you can see, Edward was being compensated – enormously. He pulled in an average stated compensation of $2.5 million the past 3 years, while the company's net earnings over those years averaged $7.5 million. His two hand picked lieutenants averaged about $800k (combined!) per year in that time frame. Fully 1/3 of the company's net profit was going directly into the pockets of the top 3 officers, the majority going to the controlling owner. Whether you believe the acumen and operational skills of these three gentleman warranted such enormous compensation is up to you, but this is not surprising or uncommon.

He controls the company, picks the board, and thus names his own pay. Only shame or fear of litigation might cause a person to reign in the excess.

None of this is new. Ben Graham talked about it nearly 100 years ago. Jay Galbraith expounded on it in The New Industrial State.

So what happened?

Part II: The payoff

None of this was ordained. For all I (or anyone else knew) this guy could have lived another 20 years, and continued collecting 1/4 of the SGA's net earnings in compensation every year.

Almost immediately after the announcement, within a day I believe, FMR (Fidelity Magellan Research) – Peter Lynch's old firm – took a significant stake. I bought my shares for between $19 and $22, about 1.5 years ago. At the time, it was a reasonable bargain with a few potential upsides, a solid history of positive earnings, a great balance sheet, a decent franchise, and a variable history of dividends. Compared to their normal earnings ($2.25/sh or so), and considering the financial strength, this company traded at a bargain (low multiple).

Of the upsides, this change of control was one. The election spending on advertising was another. A return to normal from Covid (and reversion to the mean in earnings) was another.

Shortly after FMR took their position, the board held a meeting and declared a special dividend, $2. This morning they declared another $2 dividend, along with a “variable dividend policy”. I'm not sure how that changes much, as they've paid variable dividends for years. I think it's double speak that actually means: We recognize this company is now at the behest of large stakeholders and we're going to have to return more money to owners to save our board seats.

Everybody is self interested (selfish). This rule has zero exceptions. Learn this, life and investing will make much more sense.

Part III: Conclusions

This one could have gone several ways.

1. The stock could have stagnated for a long time, with nothing happening to prompt any revaluation, cash remaining tied up in the business, and executives continuing to siphon large portions for themselves and in support of the board, which was entirely at the behest of the CEO & Chairman.
2. Some bad news could have come along, in which case the stock price may have dipped somewhat temporarily. It would be hard to imagine it falling too much for too long, as they did (even in the controlled company time) pay not insignificant dividends and were earning plenty to easily support what I thought was a rock bottom valuation, relative to the market.
3. As Walter Schloss used to say, “If I buy a dollar for 40 cents, something good might happen to me.” In this case, it took about 1.5 years to play out. In the meanwhile, I collected a few dividends. Now after these two special dividends ($4 total, the second $2 being paid in January 2023) my cost basis is essentially $15.5/sh for a company that earnings $2-3/yr and pays most of that out in dividends.

It doesn't always work out this way. If you take 20 such situations, a few will sit for years and do nothing. One might go south on you. But in a basket of such opportunities, the majority will turn in your favor, sooner or later.

It requires patience and temperament, but nothing more than basic arithmetic and the willingness to investigate (read!). You don't need an Einstein IQ to do this. Read everyday and be willing to say No to almost everything.

Tune out the daily macro bullshit. Focus on businesses.