After a non-binding takeover offer a little while ago that was great for its share price, iSelect Ltd (ASX: ISU) shares crashed again on the surprise resignation of its Chief Executive and Chief Financial Officer.
Management subsequently announced yesterday that there are no reasonable prospects of a board-recommended transaction materialising at this time, and iSelect would instead focus on 'operational and capital management initiatives'.
A share buyback has been implemented, with Bell Potter Securities being delegated to buy back up to 10% of iSelect's shares on issue in the next 12 months. As experience with CSL Limited (ASX: CSL) and Warren Buffett's Berkshire Hathaway has shown, share buybacks are an effective way to return wealth to shareholders and increase earnings per share.
However, market watchers in the US are increasingly commenting on companies' propensity to 'engineer' increases in earnings per share by conducting buybacks, without necessarily improving the underlying business performance.
iSelect has been criticised in recent times regarding the usefulness (or lack thereof) of its business model, which is comparing insurance products such as those offered by Medibank Private Ltd (ASX: MPL) or NIB Holdings Limited (ASX: NHF).
My recent research into the insurance industry suggests that iSelect may in fact become quite prosperous if it can effectively exploit the difficulty and confusion that consumers experience when trying to choose an insurance policy.
Indeed, a key recommendation of Ernst & Young's recent report on the global insurance industry was that insurers use innovation and personalised data to combat churn and help differentiate between products.
This is iSelect's niche and with the underlying business still growing, a share buyback (funded from existing cash) and other capital management initiatives yet to come, the stock could be worth a closer look. On the downside, comparison websites are ten for a dollar in internet search engines, and iSelect faces stiff competition. I personally would not invest in iSelect right now.
