art9907 - July 1999 Stock Repurchase Programs and Equity...

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1 July, 1999 Stock Repurchase Programs and Equity Performance Ali Erdem Senior Research Associate Freeman Associates Investment Management LLC Rancho Santa Fe, CA In months past, investors seem to be reawakening to the seemingly antiquated notion of a link between corporate fundamentals and share prices. Giving credit where it is due, some investors have already capitalized on the fundamental opportunities of mega-cap growth mania. Over the last three years the market and the media were completely captivated by the “New Nifty Fifty” momentum stocks. Meanwhile, sage corporate managers were making sound investments that the broad market would not; they were actively buying up shares in their own firms. A stock repurchase is a firm’s purchase of its own common stock. Firms disclose their intent to buy back stock in repurchase announcements. Generally the firms will have the right but not the obligation to buy back stock after these announcements. As shown in the figure below, the total value of stock repurchases announced by members of the NYSE, AMEX and Nasdaq exchanges soared from just over $25 billion in 1991 to in excess of $200 billion last year. Over this time, the ratio of repurchase announcements to cash dividends paid increased Total Amount of Repurchase Announcements and Dividends 0 50 100 150 200 250 85 86 87 88 89 90 91 92 93 94 95 96 97 98 $ Millions Repurchase Announcements Dividends
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2 from 22% to 92%. Stock repurchases can serve as a simple tax-effective surrogate for dividends and since dividends are an important component of equity valuation, it behooves us to investigate the effects of repurchase programs. In addition, these programs can also signal strong belief by management that their company’s stock is substantially undervalued. Like many things in life, stock repurchases are most easily understood when you know virtually nothing about them. We can accept very little about repurchases at face value. The reasons for repurchases are many and varied, as are the impacts of the programs. As I stated earlier, repurchase announcements exceeded $200 billion in 1998. The operative word here is announcements. Because of the intricacies in repurchase reporting, we still don’t know the actual extent of last year’s programs. Some programs were aggressively implemented while others remained firmly in the starting blocks. Obviously, valuation implications for repurchase programs require us to separate those that actually purchase from those that merely posture. Those that do repurchase experience uneven effects as some plans reduce total shares outstanding while others attempt to abate the share dilution from massive employee stock option
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art9907 - July 1999 Stock Repurchase Programs and Equity...

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