Buying back company stock boosts investors' confidence

Arkansas Business, March 17, 1997 by David Smith

Almost 40 percent of Arkansas' 31 publicly traded companies have aggressively joined a national trend to repurchase their own stock, and results generally are upbeat for shareholders.

In the past two years, 12 state companies - ranging from giant Wal-Mart Stores Inc. to tiny Forrest City Financial Corp. - have announced plans to buy back portions of their stock.

The amount of stock to be purchased varies. Forrest City Financial said last March it would buy a little more than 10,000 shares (about 5 percent). Dillard Department-Stores Inc. said last month it would spend as much as $300 million on its stock (less than 9 percent). Wal-Mart plans to spend $2 billion this year to buy a little less than 4 percent of its stock.

"Companies have been doing this forever," says Keith Krueger, senior vice president and equity division manager at Stephens Inc. of Little Rock. "It just happens to be more visible right now."

Reasons for the buybacks vary:

* Southwestern Energy Co. of Fayetteville announced in February 1995 that it would buy as much as $30 million of its stock.

"As we looked around at investment opportunities with the capital that we had available, our stock looked like one of the best things we could find to buy," says Stanley Green, Southwestern's executive vice president for finance and development.

* Texarkana First Financial Corp. has had two $ percent stock buybacks in the past year. The first, announced in May, was for company stock option plans for officers and directors. In October, Texarkana First Financial announced it would buy almost 100,000 more shares.

"Proceeds from our initial public offering were so successful that we ended up with an extremely high equity ratio," says James Sangalli, chief financial officer. "And the analysts and stock brokers seemed to think that one of the major criteria for investing in a company's stock is the return on equity."

The repurchase worked. Texarkana First's ROE for the first four months of its fiscal year was 9.49 percent, up from 8.44 percent for the first four months of last year.

* Finally, the primary reason seems to be the message a stock repurchase sends to investors and analysts on Wall Street: "We're a stable company. We believe our stock is under-priced, and we have so much confidence in our future growth that we're going to buy our own stock."

For all 12 Arkansas companies announcing repurchase programs, stock prices have increased since the announcements. The stock prices for Forrest City Financial Corp. and Simmons First National Corp. have gone up almost 29 percent since they announced plans to buy back stock.

J.B. Hunt Transport Services Inc.'s stock has gone up only about 1 percent since the company announced in October 1995 that it would buy back one million shares, although the stock price did enjoy a spike during the first few weeks after the announcement. J.B. Hunt announced in October 1996 it would buy two million more shares.

"I think that anytime you try to attribute a stock price to any one event, it's difficult to substantiate that," says Ellis Sloan, managing principal with Meridian Management Co. in Little Rock. "But you can at least partially attribute the price moving [to the announcement to repurchase stock]."

Sloan says one common denominator for most of the 12 Arkansas companies is that their stocks have not performed well in the past year or two.

"[The repurchase] is part of a management plan to bolster interest in the stock," Sloan says.

Analysts seemed to think that Dillard's announcement to buy as much as $300 million of its stock was the major reason the stock jumped $1.63 on Feb. 25.

Since January 1995, when Wal-Mart announced its first-ever stock repurchase of $100 million, the Bentonville retailer has kept upping the ante. In September 1995, it increased the repurchase to $150 million, then $400 million in June last year. On March 6, Wal-Mart announced it would buy $2 billion [TABULAR DATA OMITTED] of its stock in the next year.

"First of all, it's a good investment," says Dale Ingram, Wal-Mart's director of public relations. "It indicates confidence in long-term growth of the company.

"There are so many places that the company can put its money, but when it reaches into its pocket and puts $2 billion into its own stock, it's a clear indication that we expect to grow."

Wal-Mart is able to make the investment because it has pared $2 billion from its inventory in the past year. The company's computer technology and partnership with vendors has allowed it to keep that much inventory on shelves and out of the back rooms and distribution centers.

Ingram says Wal-Mart expects to trim inventory another $1 billion this year.

The stock repurchase plan and Wal-Mart's decision to increase its quarterly dividend 29 percent impressed analysts.

"Each of these announcements was consistent with our expectations and are viewed as long-awaited good news," Richard Church, a retail analyst with Smith Barney Inc. in New York, says in a research report. "The transition from a growth company to a mature business just took a big leap."