Accelerated Buy Backs
An accelerated buy back, also called an accelerated share repurchase, is a gimmick used by companies who desire a way to generate cash for their shareholders without going through the formalities of a traditional buy-back program and without throwing their balance sheet out of kilter. For those companies without preferred stock who have a good supply of cash on hand, it is a way to reward their investors without the costs normally associated with premium stock shares.
A traditional buy-back program can take weeks to months to complete after the announcement is made. With the accelerated buy back the company has their broker short the full amount needed for the buy-back up front. These shares, rather than being sold are retired by the company. The broker then purchases shares using funds given to him by the company provided the company agrees to cover losses that may occur.
The benefits to these buy backs are that there is generally an increase to share prices, albeit on a short term basis. This boost in share price could generate bonuses for the executive level members of the board if they are close to attaining the goal. Another benefit is that retiring a significant portion of the company’s stock shares can artificially boost the company’s earnings per share ratios.
The negatives include an aversion that many investors have to purchasing stock from a company that has recently begun or completed an accelerated buy back. In some situations, the accelerated buy back may be the most reasonable course for a company to use to accomplish the goals they have.
In 2010, Family Dollar started their accelerated buy-back utilizing Wells Fargo as their broker. The company purchased three quarters of a billion dollars to help bump their profits from $3.04 to $3.24 per share. Their shareholders were happy with the arrangement and each earned more than Family Dollar had predicted.
In 2011 one of the largest accelerated buy-backs in history took place when Express Scripts purchased 1.75 billion dollars of its own stock. Companies like Home Depot and RR Donnelley have chosen the accelerated buy-back route to accomplish their own goals.