Answer: Try a stock buyback. I harp on executives selling their shares. When insiders sell their shares, why should you hold on to yours? The same rationale works for buying. When insiders buy shares in their company, they send a message that the stock is undervalued and they feel strongly they can get the price back up. Or the company itself can buy back shares.
Stock repurchases can benefit a corporation several ways.
First, it can help a company's balance sheet. Take Transaction Network Services Inc., Reston, Va. Two years ago, it raised tens of millions of dollars through two stock offerings. TNSI had the proceeds from the offerings sitting in the bank, not needing the funds to operate.
But analysts and institutional buyers thought TNSI's cash position was too high, and the money was earning a modest bank return. The firm wasn't looking for acquisitions, so why hold the cash? It could lower its excessive cash position through a buyback and send investors a positive message.
Stock repurchases also make earnings per share look more attractive. Take American Management Systems Inc. of Fairfax, Va.
On Aug. 3, AMS announced its board authorized the repurchase of one million shares, a total value of more than $30 million as of Aug. 7. AMS doesn't need the buyback to change investor sentiment. The stock closed Aug. 7 at $31.13, less than $2 off its 52-week high.
And AMS isn't overladen with cash. It has $44 million in the bank. Even if its cash position were higher, AMS would still want to keep the money handy to scare up some acquisitions. By repurchasing shares, AMS is lowering the number of shares on the market.
If you lower the number of shares and hold earnings constant, the company's earnings per share will rise. This can balance out the dilution of earnings that occurs when the company issues stock options to its employees.
Feedback
In the July 30 issue, I drew some comparisons between large, acquisition-hungry companies, like Lockheed Martin Corp., Bethesda, Md., and small, chugging-along firms, like Integral Systems Inc., Lanham, Md. One reader responded: "By comparing the large company with the (comparatively) small company, you clearly make some often overlooked points. By the way, when did the focus of running a company change from 'doing important work well for your customer' to 'big, big, big?' "
Companies haven't completely abandoned their focus on pleasing the customer. But the overwhelming desire to be the biggest fish in the pond started long before Gates, Carnegie and Vanderbilt.
In the July 16 issue, I discussed a new company's creative way of handing out stock - not through an underwriter in an initial public offering. I warned readers to look closely at such deals and not assume shares of not-yet-public firms are a gold mine in the making.
One reader took exception: "Your discussion of creative share distribution strategies curiously implied they have a flaw ... if the stock later goes down. I believe you are mixing apples and oranges. Stocks, however distributed, have the potential to rise or fall. You aren't a defender of IPO distribution patterns that favor institutional and wealthy individuals ... are you?"
Point taken. I didn't mean to infer individuals should not be able to dabble in IPOs or that all creative share distributions are scams. But I will emphasize again the key point of that column. Just because stock is made available to you before or during an IPO doesn't mean you are bound to make money on the deal. Before you buy, do your own due diligence. IPOs don't always appreciate in value.
For questions, comments and suggestions, contact Bob Starzynski via e-mail at bobs@pnbi.com.
