Why Acme United’s Stock Buyback Is Better Than An Extra Dividend
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.
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|
|Earnings Per Share (EPS)||0.93||0.99|
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?
|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.|