Loews chief James Tisch beats Buffett returns

Peter Foley/Bloomberg - Loews chief executive James Tisch is the dealmaker who won’t make a deal.

Loews chief executive James Tisch is the dealmaker who won’t make a deal.

He has almost $50 billion to invest, including premiums from an insurance company his New York-based conglomerate owns. Yet Tisch hasn’t made a big purchase in five years, holding off even during the 2008 and 2009 financial meltdown, when the Standard & Poor’s 500-stock index fell more than 50 percent.

Tisch gives a musical answer when asked about acquisitions. “Do you remember Diana Ross and the Supremes?” he muses in his seventh-floor office on the East Side of Manhattan. He then breaks into a smooth, tenor rendition of one of the Motown trio’s 1960s hits.

“You can’t hurry love,” Tisch croons, slicing the air with his hand. “No, you just have to wait.”

Tisch, 59, says he won’t rush into any big purchase. Other U.S. corporate chieftains are equally reluctant. The companies in the S&P Industrial Index, which excludes financial firms and utilities, are holding a record stash of more than $1 trillion and, like Loews, are using some of their cash to buy their own shares.

Even while counseling patience, Jim Tisch and his management team have outperformed the value investor and serial acquirer to whom they’re often compared: Warren Buffett. Since Tisch took over the top spot at Loews in December 1998, the firm’s shares have returned 8 percent annualized through the end of March, almost double the 4.3 percent return of the Class A stock of Buffett’s Berkshire Hathaway, a company more than 10 times the size of Loews.

Growth in Loews’s book value per share — a metric favored by Buffett — has averaged 10 percent annualized from 1998 through 2011, compared with 8.1 percent for its rival.

“That’s validation of Loews’s ability to allocate capital,” says Fred Fialco, a portfolio manager at Torray, a Bethesda-based investment firm that owns Loews shares. “They know how to compound earnings.”

Tisch guides Loews as part of a triumvirate. He is president and chief executive; his brother Andrew, 62, and their cousin Jonathan, 58, are co-chairmen. Together, they run a conglomerate with a $15.2 billion market capitalization as of April 10 that traces its origins to a single New Jersey hotel bought more than six decades ago by Jim Tisch’s late father, Laurence, and his late uncle, Robert.

Collectively, Jim, Andrew and their mother, Wilma, together with Jonathan and his mother, Joan, own 21.2 percent of Loews shares, worth $3.2 billion on April 10, according to government filings.

The company now oversees 17 luxury hotels in the United States and Canada, insurer CNA Financial, four dozen oil rigs and drill ships, a $2 billion natural gas exploration company, and pipelines that carry 11 percent of America’s average daily natural gas consumption.

Today, Jim Tisch faces a choice. After spending $1.5 billion to buy back shares since 2008, he must decide whether to leverage the company’s cash to go after the kind of beaten-down assets that have generated dramatic gains for him in the past.

Buffett has been spending: In September he paid $9.7 billion for Lubrizol, a specialty chemical maker.

Tisch has been holding back. “We have asbestos-lined pockets,” he says. “We don’t let cash burn a hole in them.”

How to outperform Buffett

One reason Loews has outperformed Buffett — who was a friend and bridge partner of Laurence Tisch — is that Jim Tisch, the consummate contrarian, bought such assets as rigs and pipelines near cyclical lows. He also was willing to divest assets — something Buffett seldom does — by selling watchmaker Bulova in 2008 for $263 million and spinning off tobacco giant Lorillard the same year.

Tisch’s readiness to buy his own stock has also distinguished him from Buffett, and has pushed up Loews shares. He has reduced the company’s publicly traded shares by about 30 percent since 1998, taking advantage of the stock often being priced at a deep discount to the value of the companies Loews controls.

In mid-April, the discount to the value of the company’s subsidiaries and other holdings was more than 25 percent. Three of the units — Boardwalk Pipeline Partners, Diamond Offshore Drilling and insurer CNA Financial — are, like Loews, publicly traded.

“The market underestimates Jim Tisch’s skill as an allocator of capital,” says Michael Price, founder of MFP Investors. “If I owned Berkshire Hathaway, I’d sell it and buy Loews.”

Share buybacks by S&P 500 companies totaled $409.1 billion in 2011, up from $298.8 billion the year before. Last September, Buffett joined the parade, launching a share repurchase plan, though in a small way. In his Feb. 25 shareholder letter, Buffett said Berkshire had repurchased $67 million in shares — a tiny percentage of its $195 billion market capitalization on April 10.

“We like making money for continuing shareholders, and there’s no surer way to do that than by buying an asset — our own stock,” he wrote, adding that such purchases need to be made at a price that’s below the company’s intrinsic value.

Berkshire stopped buying when the stock reached 110 percent of book value.

‘We find a consensus’

Tisch made his reputation as a contrarian value investor. In 1982, as a vice president in Loews’s investing department, he bought seven supertankers for $6 million each, less than their scrap value, and unloaded the last of them in 2004 for almost 10 times that amount. In 1992, he bought 39 offshore drilling rigs for about $372 million, half what a single new rig costs today. And it was on Tisch’s watch in 1999 that CNA turned a $9 million investment in telecom giant Global Crossing into a $1.9 billion profit in three years.

“He learned at his father’s feet,” says Ray Dalio, founder of the hedge fund Bridgewater Associates, who remembers talking about global markets over lunch with Laurence Tisch in the early 1980s. “I’ve watched it come full circle.”

Jim Tisch today oversees a vastly different company than the one run by his uncle and father — who was best known for his stint as chief executive of CBS. Loews has majority control of three Houston energy companies: 50.4 percent of Diamond Offshore Drilling; 61 percent of Boardwalk Pipeline Partners, a gas-pipeline master limited partnership; and all of unlisted HighMount Exploration & Production, a gas company operating in the Southwest.

Loews owns 90 percent of Chicago-based CNA and all of New York-based Loews Hotels, which is anchored by Manhattan’s 354-room Loews Regency Hotel.

In early March, Jim Tisch leans in the doorway of the narrow, 16-desk Loews trading floor as the investment department, headed by Chief Investment Officer Richard Scott, begins its morning meeting. The 50-person team is charged with deploying $50 billion in assets.

First up is the U.S. Treasury desk: “The two-year auction went well; the five-year auction is today,” a portfolio manager says. “I think the auction should go fine.” Later, an equities manager gives a report on Dell, the computer maker. “Revenues barely grew,” he says. “Earnings were soft; the stock is indicated down 5 percent.”

Scott, 58, who came to Loews from insurer AIG, manages three pots of money. First is CNA Financial’s $44.4 billion of paid-in premiums, as of December 2011. Because of state regulations and rating company requirements, they are invested mostly in fixed income, even though 10-year Treasuries yielded less than 2 percent in mid-April. “That’s not great for an insurance company,” Scott says.

The second pot is the $2.5 billion managed mostly for the pension plans of the Loews corporate office and CNA. The goal: beating a Loews-designed benchmark primarily made up of stocks and bonds. A big chunk of this money is in 30 hedge funds. The aim is to generate relatively stable gains, not to shoot out the lights, Scott says.

Third is Loews’s $3.6 billion of cash and liquid securities as disclosed in early March. That pool has three mandates, Scott says: to fund strategic acquisitions, to bolster portfolios or make bridge loans, and to make opportunistic investments.

Away from the trading floor, the Loews headquarters is a portrait of informality, as Tisch family members wander through the building and employees gather for on-the-fly meetings.

“We want to be as collaborative as possible,” says Andrew Tisch, who adds that face-to-face discussion is favored over memos and reports: “Keep it simple — open doors, shirtsleeves. And talk about it, don’t write about it.”

The three Tisches are equal members of the “office of the president.”

“At the end of the day, Jimmy is the CEO and has the power to overrule,” says Andrew Tisch, who wears French cuffs and dark suits. “We’ve never been overruled. We find a consensus. We work very hard to work together.”

Wall Street disapproval

On a March afternoon, Tisch leans back in his chair and points to a fever line on his computer. He’s wearing wire-rim glasses, an orange-and-green tie and a rumpled, white button-down shirt. The line shows the combined value of Loews positions in Boardwalk, CNA Financial and Diamond Offshore in real time.

The news isn’t good. As of April 10, the three add up to $35.52. Loews’s disclosed net cash and liquid securities at the time add $7.39 a share, which means that Loews stock, at $38.39 a share, is trading at a 10.5 percent discount to the value of the three listed companies, the cash and the securities.

One conclusion: Wall Street doesn’t respect Tisch’s asset-allocation skills.

“I’m taking the view that we’re a failure at promoting the stock,” he says.

As he contemplates his next move, Jim Tisch dwells on the downside of acquisitions. Last year, he told analyst Sam Yake that buying a company is like entering a pitch-black room where all kinds of dangers lurk. By soaking up Loews stock at a discount to its market value, he’s buying shares of five companies he knows.

Scott Black, founder of Boston-based Delphi Management, says the Loews lineup needs to generate more profit growth.

“The individual pieces are just not exciting,” says Black, who has owned Loews stock. “There’s great asset value, but they can’t grow the earnings. Though Jim Tisch is a smart manager, we look for things with high returns on equity.”

Yake says that Loews’s holdings are highly cyclical, and that the firm should hunt more aggressively for acquisitions.

“You can’t argue with success,” Yake says, “but they move like a turtle with two broken legs.”

Some investors say Tisch’s patience is to his credit. “He’s not caught up in the frenzy,” says Israel Englander, founder of Millennium Management, a hedge fund. “He’ll pick his spot.”

The full version of this Bloomberg Markets story appears in the magazine’s June issue.

 
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