DRIP PORTFOLIO
Are Small Shareholders Unwanted?
Voluntary buy-back offers intimate as much

By Jeff Fischer (TMF Jeff)

ALEXANDRIA, VA (Dec. 21, 1999) -- Shareholders who own less than 100 shares of Johnson & Johnson (NYSE: JNJ) and Mellon Financial (NYSE: MEL) recently received share buy-back offers from each company. Mellon calls its program the "Small Shareholder Sales Program." J&J calls its program a voluntary offering for odd lot shareholders.

These offers, at first, are befuddling to receive in the mail. We're shareholders. We're sending money to these companies typically every month. We might own a very small stake in the business (99 shares or less), true, but the record shows (in our case) that we started with one share and we have been building our investment base regularly for well over a year. Why would we want to sell now? Why wouldn't the company see the obvious: we recently began a long-term relationship with their business through their direct investment plan. They should be thankful. The offer that says, "Sell your shares, little guy," seems ungrateful instead.

Ingrates!

It does seem this way, doesn't it? You receive mail from a company in which you're a part owner and typically you're excited. "It's news or recent quarterly results with comments!" You open it and instead it's a Dear John letter. Or an attempt at one. I read these things and typically throw them away, because I'm not interested in selling the Drip Port's under-100 share stakes. The important point of today, though, is to not take these letters the wrong way.

A company offers small shareholders the opportunity to sell shares back to the company at a very low cost only with good intentions. The company is assuming that many small shareholders received shares as an inheritance, a gift, or via a spin-off and they may not have an ongoing interest in owning them. Why do they hold, then? They hang on, presumably, because it would be expensive (relative to the value of the shares) to sell them. Or, in many cases, it would be difficult to sell the shares because they are in certificate form.

To alleviate this bottleneck, a company offers an inexpensive stock buy-back program to anyone owning less than 100 shares as a convenience. Many companies offer this annually. The offerings not only prove useful to certain shareholders, but they are a way for the company to save money as well. Administrative costs, mailing costs, and program costs (annual reports) are decreased by eliminating hundreds (to maybe thousands?) of small, uninterested shareholders from the shareholder roster every few years.

What's funny about these buy-back plans in relation to direct investment plan investors, like you and me, is that the shares bought from willing sellers are typically traded through the company's dividend reinvestment plan (perhaps to us, as buyers!). So, it seems ironic that you send a check to your investment plan one week to buy more shares, and then the next week you receive the company's offer to sell all your shares (including the ones that you just bought) through that very same plan. (Duh?)

Given that companies have access to their direct investment plan databases, you would think they'd target who they make these offers to. Anyone in a direct investment plan who has bought shares in the past year, for example, or who just began the plan in the past few years, should probably be bypassed in the mass mailings that offer voluntary small share buy-backs. People who just invested last month aren't likely to turn around and dump their shares when the buy-back offer arrives in the mail. Recent direct investment plan account openers are typically in the same reluctant position to sell. So, come on, companies! Consider an intelligent mailing list before you fire these offerings out to everyone with less than 100 shares!

Of course, the problem with a targeted mailing list is any potential "legal" issue. (We live in the Great Age of Petty Lawsuits.) If a company misses just one shareholder who wanted to sell their shares and who later learns that they were bypassed in the company's buy-back offering, the company could have a problem. So, instead of creating mailing lists that weed out active direct investors, there is a safer solution.

Companies might simply want to word their voluntary buy-back offerings in a more friendly manner. For example, a company might mention in the buy-back offering that it appreciates all shareholders, and it might even want to apologize to new direct investment plan owners who logically shouldn't be receiving the letter (after all, this letter is, for me, a nuisance to receive, and it could even be seen as a slap in the face).

Even small shareholders should be appreciated. As GLSmyth pointed out on the Drip message board in this post, faithful shareholders, small or otherwise, are typically loyal customers. They trust a company with their hard-earned dollars every month, presumably for years, if not decades, and they will likely continue to buy that company's products as long as they own the stock. Plus, in 20 years, that "small shareholder" and faithful customer could own several thousand shares and they might then have children who are customers and become shareholders as well.

So, in a more perfect world, companies would be more conscious of what many "small" shareholders are trying to accomplish and should appreciate that when they mail out small shareholder buy-back offers to all their shareholders with under 100 shares.

When Drip Port received these recent mailings, we read them and discarded them. If you have no interest in selling your shares anytime soon, you should do the same. Even if you do have an interest in selling, you already have a low-cost means (your direct investment plan) through which to do so. So, most of us will never need these plans -- not unless one of our companies spins off a business that we don't want to own. This happened to the Rule Breaker Port with an AT&T (NYSE: T) spin-off and a General Motors (NYSE: GM) spin-off. Rule Breaker sold the new shares through each companies' voluntary buy-back offer.

In relation to these offers, a final thing to watch for is the bogus share buy-back offer. Somehow, less than honest parties obtain shareholder address lists. With the list and an official sounding (though phony) corporate name, they mail buy-back offers to all shareholders and offer to buy your shares at a price below the current market price. This is almost always a scam meant to take advantage of unknowing investors. These offers are worded confusingly and many investors are unfortunately tricked into surrendering their shares to the scam artist in a way that would probably, unfortunately, hold up in court (because they signed the papers).

Just remember that in general you'll only sell your shares when you're good and ready to, hopefully years from now, and then you'll sell through your direct investment plan. In 99% of cases, any offer that arrives in the mail should not suddenly derail your plan.

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Drip Portfolio

12/21/99 Closing Numbers
Ticker Company Dly Pr Chg Price
CPBCAMPBELL SOUP-29/32$37.63
INTCINTEL CORP13/16$82.88
JNJJOHNSON & JOHNSON-31/32$91.00
MELMELLON FINANCIAL CORP5/8$33.56

  Day Week Month Year
To Date
Since
7/28/97
Annualized
Drip .97% -.58% -3.38% 13.18% 28.72% 11.09%
S&P 500 1.08% .87% 3.19% 16.61% 52.69% 19.28%
S&P 500(DA) 1.08% .87% 3.19% 17.19% 55.31% 20.13%
S&P 500(DCA) n/a n/a n/a n/a 28.45% 10.99%
NASDAQ 3.36% 4.21% 17.24% 78.37% 149.18% 46.27%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
9/8/9722.3909INTC44.603$82.8885.81%
11/14/9711.258JNJ79.965$91.0013.80%
11/5/9828.3741MEL34.416$33.56-2.48%
4/13/988.174CPB54.586$37.63-31.07%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
9/8/9722.3909INTC$998.70$1,855.65$856.95
11/14/9711.258JNJ$900.24$1,024.48$124.24
11/5/9828.3741MEL$976.51$952.31($24.21)
4/13/988.174CPB$446.18$307.55($138.64)
  Cash: $24.36  
  Total: $4,164.34  


Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

Note
Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.