Tracking Share Repurchase Plans
QUESTION: Is there any way that I can find out which companies are buying
back stock?
-R. P.
ANSWER: In a share repurchase or buy back, a company purchases its own
stock back from the shareholders. Management and the board of directors
can have a number of motivations for pursuing a share repurchase, but
generally the reason given is that they feel the stock is underpriced and
represents a good value. Such repurchases are usually announced after a
period of relative underperformance or overall market decline.
With a share repurchase, the company consumes capital resources to reduce
stock equity. It is not surprising that share repurchases are typically
the domain of larger companies in lower growth industries. There can be
other reasons for a share repurchase. Some companies have tried to avoid
becoming takeover targets by using share repurchases to decrease the
number of outstanding voting shares, get rid of excess cash, and increase
the ratio of debt to equity. Commonly, the repurchase of shares limits the
issuing of new stock to fulfill various stock option or dividend
reinvestment plan obligations.
To examine the benefits of a share repurchase, an investor must look at a
number of factors--the number of shares involved, the price the company
will pay for the shares, the reason for the repurchase, and the impact on
factors such as earnings per share and dividends per share.
In a share repurchase, a company may choose to acquire its shares through
a formal tender offer or buy its shares on the open market. Formal tender
offers are ordinarily pursued only in cases where the company is buying
back a large percentage of its stock--10% to 30% of outstanding shares. In
a tender offer, the company will announce the tender price, the number of
shares being purchased, and the time period for the tender offer. With an
open-market approach, the firm is repurchasing its shares by simply
purchasing them on the exchange when the opportunity arises. In the case
of small repurchases to fulfill the demands of employee stock option plans
or dividend reinvestment plans, the company may not even announce the
repurchase before the fact. These repurchases will have little or no
impact on the stock price.
For announced repurchases, the amount of information the company will
disclose depends upon the aim of the repurchase--an attempt to increase
the company's share price versus an attempt to purchase the shares at the
lowest possible price. Typically, it will disclose the number of shares or
amount of money set aside for the repurchase. However, the company may
leave the timeframe of repurchase open-ended to allow it to buy shares on
market weakness in order to provide support for the company shares. In
some cases, it will provide a range of prices at which it will step in to
purchase shares. The short-term market reaction of open-market purchase
announcements is typically much more subdued than tender-offer
repurchases, but it is nonetheless positive.
Overall, the short-term impact of share repurchases tends to be positive
for investors, assuming that the company remains adequately capitalized
and that it is not pursuing this strategy to avoid a takeover. With most
share repurchases, management and the board of directors are attempting to
decrease the number of outstanding shares. If the company can, at a
minimum, maintain the same level of income, then the income stream for
each share-represented by figures such as earnings per share-goes up. A
smaller number of shares get to split the same pot. The key for the
long-term investor is that a company may be able to increase earnings and
dividends down the road. In looking at a company repurchase decision, you
need to ensure that the firm is not compromising long-term performance for
a short-term gain.
The Online Investor (http://www.theonlineinvestor.com/buybacks.phtml) is
one of the few sites offering free access to share repurchase information.
The "Buybacks" segment of the site lists repurchase announcements by date
along with dollar value or share count of the repurchase announcement. For
example, on July 24, Merck announced a $10 billion share repurchase plan.
This is a follow-up up to a 2000 repurchase plan that spent over $7.7
billion through June of this year. The Online Investor uses EarlyAlerts
(www.earlyalerts.com) as its data source. This fee-based site provides
real-time announcements on a range of elements such as splits, buybacks,
upgrades/downgrades, earnings surprises, and mergers via E-mail. An annual
subscription to EarlyAlerts costs $99 per year; a two-week trial costs
$3.95. |
