Flush with cash, soft drink giant Coca-Cola said Friday that it will buy up to 10.6% of its stock over the next three years, a purchase that would cost $1.8 billion at current prices.
Stock repurchase programs are increasingly used by cash-rich business to enhance stock prices, increase earnings and deter takeovers. General Motors, for instance, in March announced a $5-billion repurchase plan over the next three years--the largest buyback ever.
"This is a substantial buyback," said analyst Emanuel Goldman of Montgomery Securities. "If their stock goes up substantially, they have made a very good investment for their shareholders."
Coca-Cola joins the growing list of companies such as Gencorp, ITT, Hewlett-Packard, IBM and Kimberly-Clark that have announced stock repurchases this year. Industry analysts estimate that $18 billion worth of stock buybacks were announced during the first half of this year and a total of $45 billion were reported in 1986.
Following Coca-Cola's announcement, a rush of orders forced the New York Stock Exchange to temporarily halt trading. Coca-Cola closed at $47 a share, up $2.
'Create Shareholder Value'
Coca-Cola plans to buy 40 million of its 378 million shares. The announcement followed Thursday's statement by the company that it would sell off 51% of its Canadian bottling interests to the public.
Coca-Cola chairman Roberto C. Goizueta said in a statement, "The plans announced yesterday and today are entirely consistent with our management's overriding objective to create shareholder value over time. . . . We believe that this repurchase program is a good use for a portion of our projected excess cash flow."
Coca-Cola, which has bought 42 million of its own shares in previous repurchases since 1984, said it will have enough cash left over to finance expansion plans and for any possible acquisitions.
Analysts estimate that Atlanta-based Coca-Cola, the nation's largest soft-drink maker with 40% of the market, has $1.5 billion in the bank. Additionally, company spokesman Carlton Curtis said Coca-Cola generates another $1 billion a year in cash and can borrow up to $800 million annually.
"They have so much cash," said analyst Joseph J. Doyle at the brokerage firm Smith Barney, Harris Upham & Co., that "they can't put it all to work--such a problem we should all have."
The company, as a result of spending more money on the buyback, may cut back spending on its Columbia Pictures Industries division, said Goldman. "They have been putting a lot of investment into the entertainment business," he said. "They have gotten the business up to a pretty big size."
Goldman expects the program to increase earnings by a nickel a share.
"Over the last three years, buybacks have been at very high levels," said Martin Skala, a senior editor at Outlook, an investment newsletter published by Standard & Poor's Corp. Many corporations have found themselves with extra cash after selling off divisions, he said. Other companies, wary of corporate raiders, have bought back shares to boost their stock price, thus making a takeover much more expensive.