Buy Back Shares, Then Issue More?

Last week, investors marveled at what seemed like temporary financial schizophrenia from American Oriental Bioengineering (NYSE: AOB  ) .

On Monday, AOB announced it planned an up-to-$75 million stock buyback program. But it baffled investors less than 24 hours later by also disclosing plans to issue $125 million in convertible preferred stock in a private offering. 

After shares of AOB fell as much as 11% on that news, the company pulled one more about-face. Citing "prevailing market conditions" that made the deal's terms unacceptable, AOB pulled the offering from the market.

Many investors might be confused about how a company could announce plans to spend cash to reduce its share count one day, then go begging for more funds the next. It may help to remember that the stock buyback plan is not mandatory. AOB can spend anywhere from zero dollars up to $75 million during the buyback period. Therefore, AOB's announcement of a buyback just before a financing, while odd timing, is not necessarily an inconsistent strategy.

At the end of the first quarter, AOB had $159 million in cash and equivalents on its balance sheet. In the past, it's used that cash to acquire smaller Chinese rivals and acquire new products -- a winning strategy for other consumer health-care companies like Chattem (Nasdaq: CHTT  ) and Johnson & Johnson (NYSE: JNJ  ) .

Companies buy back shares all the time. Sometimes they do so for good reasons, sometimes not. While the timing of its buyback and financing plans was unique, that shouldn't change your opinion of AOB one way or the other, however you felt about it to begin with.

Find out why American Oriental Bioengineering is a pick of the Motley Fool Hidden Gems newsletter by grabbing a free 30-day trial.

Fool contributor Brian Lawler does not own shares of any company mentioned in this article. Johnson & Johnson is an active Income Investor pick. The Fool has an A+ disclosure policy.

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  • Report this Comment On June 11, 2008, at 3:42 AM, bsb2182 wrote:

    "...that shouldn't change your opinion of AOB one way or the other, however you felt about it to begin with."

    I have to disagree with the statement that it shouldn't change your opinion of this stock. AOB's management has issued dilutive share offerings in 2005, 2007, and just tried to do it again in 2008. I haven't looked into the 2005 offering, but the money for the 2007 offering was not needed at the time and was not used, and management never provided any justification for the share offering... none. Considering that AOB has more than $175M in the bank now, do they really need MORE money? Especially without providing any justification other than their standard "will be used for acquisitions" statement?

    Yes, this company is making tons of money, but management's clear intention to continue diluting shares with no clear benefit to shareholders SHOULD affect your decision.

  • Report this Comment On June 15, 2008, at 6:07 AM, hliu2008 wrote:

    Share dilution may reflect one of the management strategies, increase the volume of company stock on market but shrink the value of each share. Retrospect data reveal that from 2003 to 2007, each year the share dilute 21%, 44%, 12.5% and 21% respectively. Share dilution should be taken into consideration to justify the perspective of share value.

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