BUYBACK BENEFITS; COMPANIES CAN PROSPER BY PURCHASING OWN SHARES.
When a stock drops, it's not always bad news to the company. For some, it's a buying opportunity.
Scores of companies - including locals such as The Walt Disney Co., Golden State Bancorp and K-Swiss - have announced stock buyback programs in recent months. These companies hope to take advantage of low share prices to improve their bottom line, just like individual investors buy stocks they consider cheap and hope will rise quickly.
In a stock repurchase plan, the company uses available cash or borrowings to buy back its shares, usually in the open market, much like investors do. The shares may be retired, used for stock option plans or in lieu of dividends.
The number of buyback announcements have skyrocketed from 438 deals in 1991 to 1,283 last year, according to Securities Data Co., a New York-based financial information firm.
While the pace has abated in the first half of 1998, it's still a robust 541 deals. That compares with 606 for all of 1993.
Wall Street loves buyback news, usually rewarding the announcement by giving the company's stock a boost.
The rationale is simple: Companies buying back their shares believe it's a good value and there's good news to come that will raise their stock prices. Investors hope to jump in before the company does and ride the stock as it moves up.
Why would a company use its money to buy its own shares rather than to build up its business? There are a number of reasons:
-- A company could think its share price has been unfairly lowered. For example, a stock can get hammered when it or its industry falls out of favor. Analysts said that's one reason why many semiconductor firms are repurchasing their stocks this year, taking advantage of lower prices caused by the Asian crisis.
-- A company with excess cash may choose to buy its own shares rather than give out dividends. Once a company gives out dividends, investors expect them to be passed out regularly. But if the company's cash dwindled in future years, it might have to cut the dividend and anger shareholders.
-- A company could be taking advantage of the lower price to infuse its employee stock option program. That way, when employees earn their shares later, the company has bought them for less money.
-- A company could determine its earnings per share will be better with fewer shares on the market since profits would be divided among fewer shares.
That's what Xylan of Calabasas hopes will happen.
It has started buying back up to 2 million common shares, or 4 percent of its outstanding stock, after announcing its intention in January.
While the shares will be used for its stock option plan, the company said that it will benefit in the short term by having fewer shares outstanding.
``We will have fewer shares, so earnings per share should go up,'' said David Rodewald, spokesman for the maker of network switches.
Indeed, the stock prices of companies with buyback programs seem to perform better than their peers, according to a 1995 study.
The report shows that shares rose a cumulative 12 percent higher in four years than firms without buybacks. The study looked at 1,200 companies announcing buybacks from 1980 to 1990 and tracked their stock performance for four years after the news.
And when the field of companies is reduced to just those with a low book-to-market ratio, those companies outperformed their peers by 45 percent in four years, said David Ikenberry, a finance professor at Rice University in Texas and co-author of ``Market Underreaction To Open Market Share Repurchases.''
But before investors plunk their money into every company that announces a share buyback program, they should know that not all buybacks are created equal.
David Fried, editor of The Buyback Letter in Malibu, looks for repurchase plans that actually reduce the number of shares outstanding. That's because when buybacks are used for things such as stock ownership plans, over the long-run it just transfers shares from investors to employees.
He also searches for companies whose stocks are at a historical low and with a track record of following through on their buyback programs.
Two-thirds of buyback programs either are canceled or abandoned before all of the shares intended to be bought are purchased, said Richard Peterson, Securities Data spokesman.
Since companies rarely announce a change of buyback plans, investors should contact the firm's investor relations firm to find out the status - and success - of a buyback program.
Fried's cherry-picking has landed investments such as Dell, which made four buyback announcements ranging from $205 million to $1.35 billion from February 1996 to September 1997. The price was $41 in early 1996. It's now around $96.
Another choice was Wal-Mart, which had three buybacks in the last two years. Its stock hovered at $27 in 1996 and now rests at more than $60.
His model portfolio of buyback stocks has an annual return of 35.8 percent compared with 30.8 percent for the Wilshire 5000 Index from Jan. 1, 1997, to May 31, 1998, according to Hulbert Financial Digest, a Virginia newsletter tracking service.
However, it lagged the index for the first five months of the year, with a total return of 21.6 percent vs. 29.7 percent, the tracking service reported.
The number of company buyback programs peaked in 1996, but remains at a healthy pace this year.
Year Amount No. of deals
1990 $36.1 million 1,009
1991 $20.4 million 438
1992 $35.6 million 600
1993 $38.3 million 606
1994 $73.8 million 1,014
1995 $99.5 million 1,115
1996 $176.3 million 1,479
1997 $181.8 million 1,283
1998x $72.9 million 541
x As of last week
SOURCE: Securities Data Co.
These are among the area companies that have announced buyback programs in 1998.
(shares or Announcement
Company HQ dollar amount) date
WellPoint Health Networks Woodland Hills 8 million shares July
Public Storage Inc. Glendale 10 million shares June
Golden State Bancorp Glendale $160 million May
Highland Bancorp Burbank 115,000 shares May
The Walt Disney Co. Burbank 133 million shares April
Zenith National Insurance Woodland Hills 1 million shares February
Xylan Corp. Calabasas 2 million shares January
K-Swiss Inc. Chatsworth $2.83 million January
Drawing, 2 Boxes
Drawing: (Color) STOCKS
L. Eric Craven/Knight-Ridder Tribune
Box: (1) BUYING SPREE (See Text)
(2) LOCAL DEALS (See Text)
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|Publication:||Daily News (Los Angeles, CA)|
|Article Type:||Statistical Data Included|
|Date:||Jul 20, 1998|
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