As last week’s market meltdown encouraged investors to look for deals among otherwise solid companies caught in the carnage, some pundits speculated that companies themselves might go bargain-hunting their own stock.
Not so fast, say experts in the field of stock repurchase programs, which can enable companies to bank shares for acquisitions or reduce dilution when employees exercise options. Volatile markets, especially in the middle of earnings season, are not necessarily the most prudent times to conduct such corporate housekeeping.
Regulators tend to take a dim view of any action that could been viewed a manipulating a stock’s price, such as an unusually large purchase coming too close to news that could be considered a market-moving “material event”.
That sort of conduct moves companies out of “safe harbor” rules established by the Securities and Exchange Commission requiring they follow certain guidelines concerning timing, price, and volume of repurchased shares.
“Companies tend take a long-term approach to their repurchase programs,” said Steven Stokdyk, a partner in the Los Angeles law office of Latham & Watkins LLP. “That way they comply with anti-manipulation rules and as well as the safe harbor for repurchasing shares.”
However, the speculation was to be expected following 2006, which is likely to shape up as a record year for corporate stock repurchases, according to Standard & Poor’s. The credit rating firm has been tracking a significant uptick buyback activity among S & P; 500 companies since the fourth quarter of 2004.
Expectations are for similar buying spree in 2007. Many cash-flush Los Angeles-area companies conducted significant repurchases in 2006, with directors authorizing additional buys for the coming year, according to recent regulatory filings.
DirectTV Group Inc. which recently completed a $3 billion repurchase, last week announced a new $1 billion authorization. Occidental Petroleum Corp. last month added 15 million shares to its existing 40 million share program, which was down to less than 9 million shares as of the end of January.
City National Corp., the holding company for the L.A. County’s largest bank, last year repurchased 2.3 million shares at an average cost of $69.01, a good discount to the stock’s $72.36 March 1 close. Around 1.1 million of those shares were used in the bank’s $167 million recent acquisition of Nevada-based Business Bank Corp, according to Chief Financial Officer Christopher Carey.
City National uses a combination of repurchases and dividends to return cash to shareholders, said Carey, noting that the company paid a total dividend of $1.84 per share in 2006.
While other companies also tout repurchase programs as a way to reward investors, portfolio manager David Stepherson at Hardesty Capital Management in Baltimore says he’s rather get a dividend instead.
“One of the most inefficient ways for companies to return capital to shareholders is through a stock buy-back most of the time they have other reasons,” said Stepherson, whose firms owns 82,000 shares of Thousand Oaks-based biotech Amgen Inc., which has long offered a generous option and stock purchase program to employees
Amgen does not pay a dividend, but spent $5 billion last year to reaquire more than 70 million shares. In December its board authorized a new $5 billion program on top of the $1.5 billion remaining in the previous program.
