Repurchases of Shares by Companies

Convincing evidence that many companies do in fact accumulate more capital than they need is seen in the prevalence of repurchases of stock in the open market.

A check in 1951 of companies listed on the New York Stock Exchange showed 430 (or 40.3%) holding shares of their own previously issued common and preferred stocks. A compilation by the Exchange in 1934 indicated 250 (or 32%) of the corporations held such stock in the treasury.

It is appropriate to mention that there are legitimate reasons (other than possession of surplus cash) for reacquiring stock, such as

• for retirement under sinking-fund provisions,
• to acquire assets which cannot be purchased for cash, and
• for distribution to employees as awards or
• for sale under company stock-purchase plans.

These repurchases as a whole present ethical questions which have not been thoroughly considered either by managements or stockholders.

It is assumed to be a "smart" thing to buy in stock at the lowest possible price, just as a smart buyer would purchase anything else.

For some reason, managements consider their duty lies only to those stockholders who do NOT sell, and that they have no obligation to deal considerately with anyone so disloyal or so speculatively minded as to want to dispose of his shares.

Furthermore, the argument runs, the company could refrain from buying shares at all, in which case those selling out would receive a still lower price. Hence, there can be no unfairness in paying a price, however small, as long as the seller could not do better elsewhere.


Ref: Security Analysis by Graham and Dodd