Why Acme United’s Stock Buyback Is Better Than An Extra Dividend

Logo of 4 Acme United Brands

Acme United's products are organized under four global brands: Westcott, PhysiciansCare, Clauss and Camillus, all of which serve a growing customer base that includes the world's premier retailers and merchandisers.

As expected, it was a quiet Thanksgiving news week.

Acme United (ACU – $9.84) announced that its Board of Directors approved a new stock repurchase program of up to 200,000 common shares.

With slightly over 3 million shares outstanding at the moment, this means that over 6.5% of all shares can potentially be retired. Of course, we’re not sure they will be bought back, but we do know that Acme has a solid history of buying back shares. For instance, during the 12 month period ended September 30, 2010, Acme purchased 250,000 shares of its common stock for approximately $2.4 million.

So we may soon find Acme United with less than 3 million shares outstanding. This shows that, next to Rare Earth Elements, we also deal in Rare Shares Outstanding on Smallcaps.us.

Extra Dividend

Some people suggest that a one-time cash dividend is better for shareholders than a share buyback. We disagree, because we’re long term shareholders.

If Acme United bought 200,000 shares at today’s stock price, it would cost about $2 million. If Acme were to spend that same amount on a one-time cash dividend, each shareholder would receive $0.64 for every share held. Sounds nice, but unfortunately the story doesn’t end there. See, a Company’s stock price typically falls on the ex date of a large dividend, which is logical as the Company is worth less because it has less assets (cash).

Moral of the story, you end up with $0.64 per share in your brokerage account, but also with shares that are worth less than the day before.

Share Buyback Example! Before Buyback After Buyback
Net Earnings $2,842,000 $2,842,000
Shares Outstanding 3,069,337 2,869,337
Earnings Per Share (EPS) 0.93 0.99
Stock Price $9.84 $9.84
P/E 10.58 9.94
Acme United earned $2,842,000 in FY 2009 and currently has 3,069,000 shares outstanding. With 200,000 shares less outstanding, its EPS automatically increases and its P/E ratio decreases.

Now on the other hand, if Acme purchases 200,000 shares, shareholders benefit permanently because:

  • The buybacks support and provide stability to the share price;
  • Earnings per share increase. As a result the stock trades at a lower P/E, hence the stock price is bound to go up;
  • The quarterly dividend may increase. This would be a logical step because the Company can pay its dividend divided by fewer shares. (At this moment, ACU pays a quarterly dividend of 6 cents per share.)

Moral of the story, you end up with scarcer shares whose price are bound to increase and for which you probably receive a higher quarterly dividend.

New Reports Coming Up

Next Monday, we will introduce a new concept on Smallcaps.us called the 5-Minute Report. The idea behind it is to give readers, who are already familiar with Acme United, a concise overview of Company’s third quarter of 2010. As the name suggests, the Report can be read in 5 minutes or less.

We’re also putting together a full Q3 Company Report, which will be published next week.

How about you? Do you prefer a stock buyback or an extra dividend after all? Why?

For important disclosures, please read our disclaimer.

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