Companies find their own stock a bargain they can't resist
Boston — In the fourth quarter of 1987, 69 companies each bought more than 1 million shares of their stock. This number raises the eyebrows of Edwin Buck, the editor of Vickers Weekly Insider Reporter, in Brookside, N.J. He tracks corporate buybacks and insider buying and selling, and the number is his.
``I was surprised there wasn't more activity, but I think you'll see more reports coming in.'' Insiders, including executives and directors, were among the buyers and sellers; their activity is legal as long as they are acting on public information.
After the stock market's collapse in October, corporate buybacks were the rage. Last year there were 1,600 buyback announcements, involving 2.7 billion shares with a market value of $85.8 billion. Big and small names in corporate America became part of the almost daily newspaper stories. Of the 1,600, only 450 occurred before Oct. 19, according to Charles Plohn, head of special equity transactions at Merrill Lynch & Co. He tracks buyback announcements and works with companies on buyback programs.
This figure contrasts with the previous record year of 1986, when 580 buybacks were announced, involving 1.1 billion shares with a market value of $46.8 billion.
``The market crash increased buyback activity dramatically,'' Mr. Plohn says, adding that the first companies announcing programs after the crash had already started work on them.
``Firms are more apt to want to buy back their shares if they think they're undervalued,'' says Randolph Westerfield, chairman of the finance department at the Wharton School of the University of Pennsylvania. ``Buybacks send out positive signals to shareholders, and they make money for the company and for the shareholder. Typically, they have a positive effect on a stock's price.''
The day after Black Monday, the Quaker Oats Company in Chicago reinstated a 1 million share buyback program the board had authorized in September 1985. The company had suspended the program in August 1986 when it decided to shift its resources to make two major acquisitions, according to spokesman Ronald Bottrell.
Two weeks ago Quaker's board approved another program, to buy back 2 million shares of common stock out of 80 million outstanding. These shares will go to the company's treasury, for general purposes. ``The treasurer has the flexibility to take advantage of opportunities as they come along,'' Mr. Bottrell explains.
Companies have three ways to use excess cash, Bottrell says. ``You can introduce new products and support them, you can acquire something, and if you don't do one of the first two, then you can buy back your stock.''
Many companies found that their stock was a terrific buy at the post-Oct. 19 prices. Quaker's stock, for example, started this month at $53 a share. The Friday before ``Black Monday,'' it had reached $43 a share, falling to a low of $37.50 on Black Monday. By Oct. 21 the price was back up to $43.62.
``Our stock was not immune to the effects of the stock market's fall, and we felt a buyback would be an excellent opportunity,'' Bottrell explains. ``The buyback program doesn't preclude the possibility that we would buy at today's price, however,'' he adds.
Such programs can take a couple of years to finish, if a board wishes. Some programs are never completed. Mr. Plohn of Merrill Lynch says he would be surprised if 20 percent of the shares authorized for buybacks after the market plunge were bought.
Not carrying out an announced buyback, or rescinding it, does not win Professor Westerfield's vote. ``The positive effects will be lost by not going through with the buyback,'' he says.
Furthermore, companies generally should be buying back their stock as a last choice, Westerfield maintains. ``One would hope a corporation would have better things to do with its money than buy back shares,'' he says, adding, ``There are more tangible benefits to the economy,'' such as capital investment, improved productivity, increased research and development, or greater product marketing.
Stock buying among the corporate insiders exceeded any level Mr. Buck had seen before the collapse. ``There are many reasons for selling stock on the open market, but an insider buys for only one reason: The stock is the best investment possible,'' he says.
A normal ratio of insider activity is 2.5 sellers to every 1 buyer of stock, but since the market's fall, insiders have been buying more than selling, Buck says. In the last couple of weeks the ratio has been 0.4, or 0.33 sellers to every 1 buyer.
``This tells me the insiders think their stock is a good deal, that the economy is in good shape, and that the idea of recession is remote,'' he says. ``Insiders are right 85 percent to 90 percent of the time. I think we'll see more inside buying.''
Buyback programs are not new. Companies have used them to indicate to shareholders their confidence in the companies' futures, perhaps the most common reason given after the market collapsed. Companies also authorize buybacks to spend cash and reduce the number of shares outstanding, in an effort to shield against a takeover.
Corporate buybacks have slowed since the almost daily listings in October and November.
``The activity is well below the fourth quarter,'' Plohn observes. ``The activity in general is quiet, because stocks are up from their October lows, companies are not aggressively chasing stocks, and it's being forecast that we probably haven't seen the market's lows.''