When members of the P.A.M. Transport Services Inc. board of directors initiated a stock buyback program at the end of 2013, they did so, in part, because they believed the company was undervalued.
A year later, with stock trading above $45 per share, management continues to see additional value in the Tontitown trucking company. Believing the company is worth more to shareholders than they're currently getting, the company is again looking to repurchase stock.
Companies using a repurchase plan is not uncommon when they are seeking to return value to shareholders in a way that doesn't include paying a dividend. A repurchase generally is more favorable to shareholders from a tax standpoint than paying out a dividend.
Plus, it also lowers the number of outside shareholders and can inflate the earnings per share. For a company with cash on hand and no outside prospects in which to invest, it is an attractive prospect.
"We could invest in other companies, or other stocks, but we feel like our stock is a good buy," Chief Financial Officer Allen West said. "We feel like the company strength has been firmed up significantly. The economy is still growing on a positive trend. We feel like it's a good time for trucking. We're glad to be able to get to this point. It's been a lot of hard work."
P.A.M., after four years of annual losses, reported $5.91 million in earnings for 2013. It is on track for another profitable year.
As a means of expressing confidence in the direction of the company, board members authorized the repurchase of 640,000 shares at a maximum price of $32 million. That equates to between $46 and $50 per share and shareholders have until Dec. 31 to participate.
Unique to last year's stock buyback is that both board Chairman Michael Moroun and Chief Executive Officer Daniel Cushman have elected to participate. Moroun could sell up to 400,000 of the 4.7 million shares he and the Moroun Trust own in the company. Moroun, either individually or through the trust, owns more than 57 percent of P.A.M. Cushman is authorized to sell up to 7,000 shares.
Participation by the two high-ranking officials within the company is a way to entice other shareholders to consider selling their shares. Last year the company received slow initial interest in the repurchase and wound up buying back more than the 600,000 it had initially committed to repurchasing.
Stock value has more than doubled since P.A.M.'s 2013 repurchase. Ultimately the company bought 640,000 shares for $21 per share. Andy Terry, a University of Arkansas at Little Rock professor of finance, said there are no guarantees the stock price could see a similar increase this year, but the repurchase offer signals executives feel good about the future.
"It's not a sure thing, but management -- the major shareholders -- has no incentive to pay too much for the shares," Terry said. "There would only be incentive there if it's a control thing. That doesn't sound like the case here. If you had one party trying to get from 49 percent to over 50 [percent], then maybe that's the motive. In this case, given the ownership, that doesn't seem like the motive."
There is some concern over whether the practice is good for the economy. Companies that might have once elected to invest earnings outside of the company, put money back into the company with capital expenditures or issue dividends to investors are now buying back stock.
Essentially, companies are using the buybacks as a way to inflate their value. The practice isn't sustainable and there are long-term consequences for the economy, Chicago University professor Douglas Skinner warned in articles he has written on the subject. Skinner is studying stock repurchasing programs dating back to the 1990s.
Bloomberg reported last year that publicly traded companies spent more than $340 billion on stock buybacks in 2013.
"The bottom-line is that market pressures -- investors' insatiable desire for ever-larger dividends and buybacks -- are forcing large U.S. companies, which are vital to our economy, to pay out more cash than ever before, raising questions about where their future earnings -- and, ultimately, the U.S.'s overall economic growth -- will come from," Skinner wrote. "Equally troubling, this mania for buyouts is taking place when the market is at record highs, in part to try and juice earnings to sustain these valuations. Not to be a doomsayer, but is hard to see how all of this ends well."
Companies like P.A.M. see little downside to the practice. While a repurchase will make stock harder to come by for potential investors, it does shore up the value for those who hang on to their shares.
"Our stock might be harder to buy in the future, but we see this as a way to return value to shareholders," West said. "There is no hidden agenda or anything. Folks who want to stay in will stay in as owners of a bigger piece."
SundayMonday Business on 12/07/2014