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?

Today's Best Small Cap Stock Ideas
1. I like Acme United because it’s fundamentally sound with over $63 million dollars in sales and $2.5 million dollars in earnings in 2010. At the same time I expect the Company to grow substantially over the next few years as it’s bringing incomparable (really!) cutting products to the market. Download your copy of the latest Company Report.
2. Global Green Solutions Inc. is developing Greensteam; a commercial-stage, high-efficiency combustion system that generates industrial steam and electrical power from waste biomass. Read our latest updates on Global Green Solutions.
3. NSGold Corporation is a Canadian junior mining company that focuses on transforming advanced exploration opportunities into a mid tier gold producer. Read our latest Company Report on NSGold Corp.

For important disclosures, please read our disclaimer.

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