Firms Show Faith With Stock Repurchases

In the last month, eight companies in the DM News Portfolio have taken advantage of market conditions to announce stock repurchase programs that are intended to boost shareholder confidence and demonstrate faith in their business models.

The repurchases send a signal to investors that the share prices of ADVO, Cultural Access Worldwide, Harte-Hanks, Group 1 Software, Damark, R.R. Donnelley & Sons, Fingerhut and Marketing Services Group are undervalued and present a good buying opportunity.

Damark, for instance, closed Sept. 29 at 7 3/16, slightly above its 52-week low of 5 1/8; R.R. Donnelley closed at 34 13/16, near its low of 32 3/8; Fingerhut closed at 11, near its low of 9 7/8; while Cultural Access Worldwide closed at 4 9/16, near its low of 3.

On the positive side, buybacks lower the number of shares outstanding and thus increase a stock's earnings per share, a figure derived by dividing a company's net income by outstanding shares that is considered a benchmark for measuring performance and predicting growth. The higher the EPS, the better off a company appears to be.

On the negative side, fewer shares on the market lowers liquidity, the ease at which investors can jump in and out of a stock. But Salomon Smith Barney analyst Janet Del Giudice said liquidity isn't impaired unless a company buys back a large percentage of its shares, typically more than 25 percent. Of the firms that disclosed the scale of their repurchases, Damark planned to buy back the most at 27 percent.

Jeremy Barbera, chairman/CEO of MSGI, intends to scare away short-term investors with a plan to buy back 1 million shares, or 8 percent.

“We're very confident in what the company is doing, and part of the way we can show that is to put our money where our mouth is by taking some of the shares off the market,” he said. “People who sell, we assume, don't know our business. People who aren't selling believe in us. We want people in for the long haul.”

Buybacks indicate that companies have a healthy sum of cash on their balance sheets to finance not only repurchases but other strategic actions that will grow their business. Harte-Hanks, which is sitting on $200 million in cash from the spinoff of its newspaper holdings, is a prime example. The company said in its announcement that while the primary use of cash will be to fund capital investment and acquisition, the chance to repurchase shares represented an attractive use of resources.

“This is part of a total allocation of capital resources and would be viewed as a positive step,'' said Harte-Hanks CFO Jacques Kerrest. “The key is what value do we bring back to shareholders.”

Portfolio Value: If $1,000 had been invested in each of these companies at the beginning of the year — for newly public companies when the stock first closed — the value would be $80,276, a decrease of 19.7 percent.

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