By Telis Demos in New York
US companies are turning to a counter-intuitive strategy to return cash to shareholders: shorting their own stock.
As companies with record cash on their balance sheets embark on a spree of share buybacks, a handful are using a tactic not seen since before the financial crisis, known as ?accelerated stock repurchases?, or ASRs.
In a traditional buy-back, the company uses a broker to buy shares on the open market. It can take weeks or months to complete an announced buyback.
But with an accelerated repurchase, the company asks their broker to short the full amount immediately. In a standard short, the broker borrows shares from other holders, sells them, then later buys shares to return them to the original holder.
In an ASR, the borrowed shares are not sold; the company retires them. The broker then buys shares to cover the short, with the company agreeing to cover any losses on the trade.
Such deals represent only a sliver of the buy-back market, which has totalled $263bn of announced buy-backs up until June 3 this year, versus $174bn at the same point last year, according to Birinyi Associates, a research firm.
In the same period there have been 26 ASRs announced, including those from already authorised buy-backs, totalling about $8.5bn, according to Citigroup.
That puts the market on pace to top last year?s total of 39 for $11bn, though still below the peak level of 117 deals for $79bn in 2007.
Not all ASRs are announced before they are completed. The largest ASR so far this year was Express Scripts, a healthcare group, for $1.75bn. Retailer Home Depot and RR Donnelley, a printing group, have completed $1bn ASRs.
There are several benefits to ASRs and other ?structured? buy-backs, in which companies use derivatives and other tools to engineer buy-backs to achieve preset price or volume targets. Accelerated repurchases can generate a bigger short-term boost to share prices, as investors might otherwise ignore a buy-back authorisation that could take years to execute.
However, the accounting rules governing ASRs are in flux. The Securities and Exchange Commission last year asked for public comment on whether ASRs should be exempt from insider trading rules in the same way as traditional buy-backs.
The Financial Services Accounting Review Board has been reviewing the accounting rules for ASRs since at least 2007.
Some investors are wary of ASRs, as they immediately lower a company?s share count, and boost its apparent profitability on an earnings-per-share basis.
For that reason, companies doing ASRs on average trade at a slight discount to their EPS, according to a joint study last year by the universities of Wisconsin and Florida.
It also found that accounting of ASRs meant that the agreement to repay brokers was often counted as a balance sheet adjustment and not as a potential liability marked to market. If the buy-back ends up being costly, the company would not take an income loss.
? The Financial Times Limited 2011