CNO Reduces Share Buyback in 4Q

CNO Financial Group Inc. (CNO">CNO) has lowered its latest share buyback due to a reduced cash balance on its balance sheet. The company repurchased approximately 2.35 million shares in the fourth quarter of 2011, significantly down from 6.6 million shares in the prior quarter. CNO Financial spent only $14.1 million in total during the quarter for purchasing the shares at an average price of $6.02.

The company’s fourth-quarter repurchase brings the total buybacks under its $100 million share repurchase program to 11.12 million shares at an average price of $6.28 per share. The total purchase price for the shares bought back since the commencement of the repurchase program in May 2011 amounts to $69.8 million.

Although the cash balance has declined moderately, CNO Financial is expected to strengthen its cash position in future with the help of a steady cash flow. This in turn should provide the company flexibility to increase the pace of share buybacks. The company has been able to maintain a solid cash position over the last few years due to substantial growth in cash flow from operating and financing activities.

Concurrently, CNO Financial also announced the prepayment of $14.1 million of the outstanding principal under its senior secured credit agreement. As per the terms of the agreement, the company is required to make principal prepayment equal to the amount of outflow toward certain restricted payments, including share repurchases, in case its debt-to-total capitalization ratio is over 17.5%.

However, if CNO Financial’s debt-to-total capitalization stays between 17.5–12.5%, principal prepayment of 50% of such amount has to be made, while no mandatory principal prepayment is required when the ratio is below 12.5%.

The senior secured principal prepayment during the fourth quarter completely covered the repayment scheduled for June 30, 2016 and also partly covered the repayment scheduled for March 31, 2016. At present, CNO Financial has no repayment scheduled under the senior secured credit agreement until September 30, 2012, when it has to repay $10 million.

The share repurchases and debt prepayment by CNO Financial is likely to have an incremental effect on the company’s book value and boost its future earnings per share. Moreover, the principal prepayment will reduce CNO Financial’s total cost of debt and debt-to-total capital ratio.

However, the reduced share repurchase did not encourage the investors. It is likely that they were expecting a higher quantity of repurchase based on the magnitude of buyback in the third quarter of 2011. Consequently, on Friday, the shares of CNO Financial closed at $6.31, down 1.56%, on the New York Stock Exchange.

The company competes with AFLAC Inc. (AFL - Analyst Report) and Torchmark Corp. (TMK">TMK). Currently, CNO Financial carries a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals of the company, we are also maintaining our “Neutral” recommendation on the shares.

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