Reynolds Stock Repurchase Will Reward Stockholders, says Professor Mike Lord

11.14.2011 Article, Business Analytics, Faculty News

Reynolds to repurchase lots of common stock
Reposted from Winston-Salem Journal | by Richard Craver

Reynolds American Inc. on Monday joined a growing trend of corporations buying back large amounts of its common stock to take advantage of having a large amount of cash on hand.

The company said its board of directors approved buying up to $2.5 billion worth of its outstanding common stock over the next 2½ years.

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. Reynolds' share price slipped 18 cents to close at $38.72 Monday.

"The share-repurchase program clearly demonstrates our continuing commitment to returning value to our shareholders," said Daniel Delen, Reynolds' president and chief executive.

Bloomberg News reported that corporations have authorized more than $453 billion in repurchases this year, putting 2011 on track for the third-highest annual total behind 2006 and 2007, data compiled by Birinyi Associates Inc. show.

The buybacks are considered a sign that corporate executives believe the U.S. economy will avoid a double-dip recession.

Reynolds' decision had been expected for months by analysts, though the amount being repurchased exceeded some forecasts by fourfold. Analysts said a stock repurchase represented a natural progression for Reynolds after the company split its stock in November 2010 and raised its dividend twice this year.

Reynolds spokesman David Howard said the company made a business decision at what "we felt was an appropriate level. It's important to note that this share repurchase program is over a longer period than usual."

The last Reynolds stock buyback was in April 2008 for up to $350 million worth of outstanding shares.

Reynolds received permission from shareholders in May to double the number of authorized common shares to 1.6 billion but kept the number of preferred shares at 100 million. The request was made to keep the proportion of authorized common shares to the level it was before the stock split, spokeswoman Jane Seccombe said.

Reynolds said British American Tobacco PLC, its largest shareholder, will participate in the share repurchase through a wholly owned subsidiary to maintain its 42 percent ownership of Reynolds stock.

Michael Lord, an associate professor of strategy and entrepreneurship at Wake Forest University, said the stock buyback will reward shareholders.

"The fact Reynolds also has made two dividend increases recently is a strong signal. They seem to be committed to both share repurchases and dividend increases, which is probably a better mix overall."

Reynolds also said it has changed how it accounts for pension and postretirement plans by adopting the "mark-to-market" methodology of accounting.

Tony Plath, a finance professor at UNC Charlotte, said mark-to-market involves changing the recorded value of an asset or liability to reflect its current market value.

The change in accounting will be applied retrospectively to prior periods.

For example, the change bolsters Reynolds' earnings by 13 cents in fiscal year 2011 to $1.88 a share. It also raised Reynolds' earnings in fiscal 2010 by 2 cents, but lowered it by 1 cent in fiscal 2009.

"We continue to monitor our pension plans closely to ensure they remain well funded," said Thomas Adams, Reynolds' chief financial officer.

Adams said Reynolds is revising its fiscal 2011 earnings guidance to a range of $2.77 to $2.82 a share compared with a range of $2.63 to $2.68 a share provided during its third-quarter earnings report. The earnings excluded the mark-to-market adjustments for the pension and postretirement plans, as well as costs for closing plants, legal expenses and tax issues.