Vote FOR management proposals to institute
open-market share repurchase plans in which all shareholders may
participate on equal terms.
Prevalence
of Stock Buybacks
The use of stock buyback programs increased greatly during the 1980s.
The total proportion of total cash payout (dividends and repurchases) to
shareholders from stock repurchases rose from 25 percent during 1983-1986
to 34 percent during 1987-1988.[1]
Stock repurchases serve two main purposes which benefit shareholders.
First, they serve as a more efficient vehicle for distributing cash to
shareholders than paying dividends. Second, announcements of stock
repurchase programs tend to result in increased returns to shareholders.
One study found that such programs result in a two-percent excess return
to shareholders.[2]
Some argue that the reason for this phenomenon is that managers either
believe their company's stock is undervalued or that management is acting
on positive inside information. In addition, buybacks result in fewer
shares on the open market, which causes an increase in price due to an
improved supply-demand position.
A potential negative attribute of share repurchase programs is that
they can be used to increase management's holdings in a given company and
make a takeover more difficult to achieve. However, shareholders may find
that the premium from a large buyback is enough to compensate for any
adverse consequences from its antitakeover effect. Shareholders should
also be wary of share repurchase programs that allow executives of the
company to purchase shares with a small down payment and take a
low-interest (or no-interest) loan from the company for the remainder of
the cost.[3]
Another downside of a share repurchase is that it may signal to the market
that a company does not have more attractive alternatives for long-term
capital investment such as acquisitions or equipment purchases.
Although used less frequently, shareholders may also encounter "Dutch
auctions." This novel buyback technique consists of an offer to
shareholders by the company to repurchase a limited number of shares at a
range of premium market prices. In essence, shareholders get to choose
their premium. The catch is that when the company counts up all the offers
tendered by shareholders, it will compute the lowest average price that
will permit it to repurchase the number of desired shares. The company
then fills the orders of the lowest bids until the share repurchase
objective is achieved. Shareholders who bid too high are left out in the
cold. However, all shareholders benefit to some extent whether or not they
tender because the auction will generally move the stock price higher.
Shareholders do not have to approve a Dutch auction; they merely decide
whether or not to tender and at what price.
