Buoyed by a healthy gain in third quarter net income, LPL Financial Holdings is now setting its sights on boosting its stock price through a $500 million share buyback plan.

Net income for the country's largest independent broker-dealer jumped 23% to $41 million for the three months ending September 30, while net revenue declined slightly to just over $1 billion.

LPL wants to "maximize shareholder returns" by taking advantage of current market conditions to "reposition" the company's capital and expense plans, says Mark Casady,  LPL chairman and CEO.

Spending $500 million to buy LPL shares is "a very good investment for us to make," Casady says. Matthew Audette, LPL's new chief financial officer, describes the buyback as "a very high statement of confidence in your own stock."

LANGUISHING STOCK PRICE

LPL's stock price was down nearly 8% from its high of $48 this year before the third quarter earnings announcement. The stock was down about 25% from its 2014 high of $56. The languishing performance of LPL share prices has drawn the attention of activist investor Richard 'Mick' McGuire, whose San Francisco-based hedge fund, Marcato Capital, disclosed that it had taken a 6.3% stake in LPL as month.

McGuire, a protégé of high-profile activist William Ackman, also has a stake in BNY Mellon and has tried to oust CEO Gerald Hassell. In an SEC filing after buying shares of LPL, Marcato called the financial service company's shares "undervalued" and said options for enhancing shareholder value may include "improving capital structure and/or capital allocation."

Casady did not respond directly when asked what impact the Marcato investment had on LPL's stock buyback decision. He did note that such plans "don't happen overnight" and that the company seeks to be "highly aligned with all its shareholders."

RAISING LEVERAGE

LPL plans to help fund its stock buyback by increasing its leverage to approximately four times adjusted EBITDA from just under three times cash flow generation. "Given the range where our shares are trading, we believe the most effective way to deploy that leverage is into our own shares," Audette said in a statement.

LPL will be able to take on the additional debt because its steady earnings stream produces "a lot of cash," and because of its "capital light" business structure, in addition to the current low interest rate environment, Audette told Financial Planning.

The IBD is also aiming to lower its year-over-year expense growth rate to 2% to 4% range, the company announced.

The company expects to achieve its decreased growth rate targets from increased productivity as a result of "significant infrastructure investment" over the past two years, Casady says.

ONLINE FOCUS IN '16

Going forward, LPL is "shifting [its] investments to client-facing activities" such as its ClientWorks tool, Casady says,  including online enhancements and a planned digital automated investing service launch next year.

For the third quarter, LPL said net revenues slipped 3% to $1.05 billion due to a "cyclical decrease" in sales commissions and "market-sensitive revenue streams."

LPL's asset gathering performance for the third quarter was strong however, as net new advisory assets totaled $4.2 billion, which converts to a 9.3% annualized growth rate, the company said.

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