Krispy Kreme Stock Share-repurchase Program Signals Commitment to Shareholders, says Professor Mike Lord

3.28.2012 Article, Business Analytics, Faculty News

Krispy Kreme launches share-repurchase program
Reposted from Winston-Salem Journal | by Richard Craver

Krispy Kreme Doughnuts is joining a growing trend of corporations buying back significant amounts of common stock.

The company said Wednesday that its board of directors has approved a share-repurchase program of up to $20 million that takes effect immediately.

As of Wednesday, the company had 68 million shares outstanding. The company said it will make stock purchases in the open market and through private transactions.

A company typically buys back its share from the marketplace to reduce the number of outstanding shares. Because there are fewer outstanding shares, it can make those remaining in the marketplace more valuable.

Companies also buy back shares when they believe the shares are undervalued. The 52-week range of Krispy Kreme's share price is $5.10 to $10.08. Its share price rose 15 cents to close at $7.46 Wednesday.

"This share-repurchase authorization is an indication of Krispy Kreme's financial strength, as well as our positive outlook," James Morgan Jr., Krispy Kreme's chairman and chief executive, said in a statement.

Krispy Kreme reported March 20 that it had $22.2 million in net income for its fiscal year 2012, which ended Jan. 29. It was the second consecutive profitable year for a company that struggled during fiscal years 2004 to 2011.

It expects to have diluted earnings of 21 to 24 cents a share for fiscal year 2013.

"Over the past several years, we have substantially improved our performance and strengthened our balance sheet, and are confident that we have the capital resources to implement and support our growth plans," Morgan said.

Krispy Kreme's decision is a relatively small financial move but more important as a signal of its commitment to shareholders, said Michael Lord, an associate professor of management at Wake Forest University.

"Stock repurchases and dividends both are ways to try to reward shareholders, but through different channels," Lord said. "Dividends would be taxed, for example, but if someone holds onto their Krispy Kreme shares, any increase in value is not taxed until the stock is sold.

Standard & Poor's said Wednesday that companies in the S&P 500 increased their spending on share buybacks in 2011 by nearly 37 percent to $409 billion.

Some companies use share repurchases and dividend increases to get more bang out of their cash reserves.

For example, Reynolds American Inc.'s board of directors in November approved buying up to $2.5 billion of its outstanding common stock over the next 2½ years.

Several major banks, including BB&T Corp. and Wells Fargo & Co., are expected to launch share-repurchase programs after getting the thumbs-up March 13 from the Federal Reserve on their capital plans for handling an economic crisis.