Capital Markets

Buybacks Still Favored By Some Companies

Many cash-rich companies are giving shareholders an early holiday gift by buying back shares and boosting dividends.
Stephen TaubDecember 3, 2004

This week, as Microsoft handed out the largest dividend payment ever, a few high-profile companies announced plans to reward their shareholders in another way: by buying back their stock.

Officials at Kraft Foods Inc., for example, said its board of directors authorized the company to repurchase up to $1.5 billion of Class A common stock. Purchases under the new authorization will begin after the current $700 million repurchase program is completed and are expected to run through 2006. The current program is expected to be completed by year’s end.

Meanwhile, Deere & Co. executives plan to repurchase up to $1 billion of common stock. The company said the announcement is the latest in a series of steps to deploy cash in a way that provides long-term value to shareholders. In recent months, Deere repurchased 3 million shares under a previous authorization and, earlier in the year, increased the quarterly dividend rate by 27 percent.

Under the plan, the company will repurchase Deere stock from time to time in the open market and through privately negotiated transactions.

Further, officials at Synopsys, Inc., which makes software used in the design of microchips, said they renewed the company’s stock repurchase program that was last approved in December 2003. Under the renewed program, the company may repurchase up to $500 million in common stock.

Companies have been buying back their shares this year partly to offset the increase in outstanding shares that resulted from option exercises and other executive and employee incentive plans involving shares, thus avoiding heavy dilution for existing shareholders.

Share buybacks are also one way cash-rich companies reward shareholders. When a company buys back its shares, the corporation’s earnings per share rise. Typically, the share price later rises, maintaining the company’s price-to-earnings ratio.

Other company officials, like those at Microsoft, have decided to use company cash to reward shareholders with a special dividend — or a larger dividend. Yesterday, for instance, the company sent shareholders a check for $3 for every share they own, for a total of $32.6 billion.

Defense contractor Raytheon Co. also plans to increase its dividend by 10 percent, as well as repurchase $700 million in shares. The program is slated to be completed over 18 to 24 months, beginning in 2005.

Indeed, nearly half of the companies in the S&P 500 have raised their dividends this year, according to USA Today, which cited Standard & Poor’s. What’s more, in 2004 at least 10 companies in the index started to pay a dividend for the first time.

Companies have also been aggressively increasing their dividends since last year, when President Bush cut the tax rate for dividend investors. His re-election buoyed dividend boosters, who are confident that the tax cut won’t be reversed.