With new taxes, or at least the possibility of tax changes, looming in 2013, some investment experts are predicting a surge in company stock buyback plans, according to the New York Times (http://www.nytimes.com/2012/11/28/business/companies-are-expected-to-increase-buybacks.html). The Times cites a recent survey by the financial data firm Markit of 100 American companies. Half of them told Times reporter Nathaniel Popper that if tax rates on dividends increase, as has been suggested, they would consider using corporate funds to buy back their own stock.

Photo courtesy of buydearborn.com

Generally speaking, there are two ways a company can return money to investors, the story notes: dividends and buying back stock, also called a share repurchase. Stocks that are bought by a company are absorbed meaning the total number of outstanding shares is reduced, which increases the value of each share still on the market.

Most often, stock buybacks are accomplished in two ways, as outlined in a recent Investopedia article titled “A Breakdown of Stock Buybacks” (http://www.investopedia.com/articles/02/041702.asp#axzz2DY4Vf9xy):

Open market. In this case a company buys shares just like an individual investor, on the open market. That’s the path chosen by Poway, CA-based Digirad * (Nasdq: DRAD, http://www.digirad.com/), which has two business divisions: one manufacturers and sells medical diagnostic imaging systems including solid-state gamma cameras; the other, called Digirad Imaging Solutions, provides diagnostic imaging services to physicians at their offices. DRAD has a market cap of about $43 million and a 52-week trading range of $1.72-$2.44. DRAD closed Nov. 29 at $2.09, down 3 cents on the day. In Digirad’s case, the Board of Directors approved spending up to $4 million in its stock repurchase program.

Tender offer. In this case shareholders are presented an offer, called a tender offer, by a company to submit (or tender) a portion or all of their shares for a certain designated time period. Typically, the company will pay a price at a premium to the market price. That’s the path chosen by Mountain View, CA-based IRIDEX * Corporation (Nasdaq: IRIX, http://www.iridex.com/), which manufactures and sells laser-based medical systems and delivery devices for the ophthalmology market. IRIX has a market cap of $36 million, a 52-week trading range of $3.07-$4.50 and closed Nov. 29 at $4.00, up 1 cent on the day. In its tender offer, IRIX has offered to buy back 5.5 percent of their currently issued and outstanding shares (487,500 shares) at $4.10 until Dec. 7 (although that deadline could be extended).

The Times article outlines some of the criticism of buybacks, basically suggesting that they can lead to the misuse of corporate funds. One of the main complaints is that the money could be better used investing “in their businesses and staff.” But in recent months many large companies have announced stock buyback programs, including Chipotle, Starbucks, BeBe Stores, Proctor & Gamble and News Corporation.

* Denotes client of Allen & Caron Inc., publisher of this blog

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