Penney to Expand Its Stock Buyback Program

DALLAS â€”  J. C. Penney Co. announced Tuesday that it will buy up to 11% of its common shares, a move which securities analysts say will strengthen its hand in the event of an unwanted takeover attempt.

The nation’s No. 3 retailer will pay for the shares--to be bought on the open market from time to time--with proceeds from the sale to employees of a new special issue of stock.

The company said the move was taken to enhance shareholder value and to improve its employee benefit program.

About 15 million common shares can be bought under an authorization from the company’s board of directors.

The price of Penney stock on the New York Stock Exchange rose $1.875 Tuesday to close at $48.125.

Penney, whose stock has been depressed recently by the malaise in the retail industry, has occasionally been the subject of takeover speculation although no suitors have been mentioned. Analysts said the buyback is an attempt by the company to boost its undervalued shares to a level that would repel a suitor.

“Obviously, by buying back more, it will prop up the price of the shares. It makes them less vulnerable to a takeover,� said retail analyst Monroe Greenstein of Bear, Stearns & Co.

The buyback program will eventually put another 9% of the company’s stock in employees’ hands. Employees already own about 15% of the outstanding common, a spokesman for Penney said.

“This certainly will be an impediment to a takeover,� said retail analyst Dennis Telzrow of Eppler, Guerin & Turner.

The special preferred shares to be issued under an employee stock ownership plan would put a block of stock in friendly hands if the company ever faced a takeover. However, a spokesman for the Dallas-based retailer said the plan is not being undertaken to thwart a takeover and said the company does not intend to take itself private. “But we do think the stock is undervalued,� he said.

“In recent years, the company has taken a number of significant steps to improve operating performance. As a result of these steps, our financial condition is stronger than at any time in the past decade. The company’s share price, however, remains undervalued,� Penney chairman William Howell said in a statement.

Earnings in the second quarter fell 21.3%, with the decline blamed in part on a continued weak market in women’s apparel. The weak apparel market, which is haunting all retailers, is attributed to the return of the mini-skirt, which has proved a disaster.

The buyback authorization represents an expansion of a program adopted last year to buy up to 20 million shares. The initial buyback program, instituted in the fall of 1987, is almost completed, the company said.

The purchases have been and will continue to be made in the open market from time to time at price levels the company deems desirable, it said.

Penney created the LESOP--leveraged employee stock ownership plan--in conjunction with the expanded buyback program. It said the LESOP, a tax-qualified employee benefit trust that invests in the securities of the sponsoring company, will replace J. C. Penney’s existing associate savings and profit-sharing retirement plan. The company will redirect its annual contribution from the savings plan to the LESOP.

In 1987, this contribution amounted to $50 million, the company said.

“The LESOP will improve the competitiveness and cost effectiveness of our associate benefit program and reinforce J. C. Penney’s tradition of broad-based associate ownership started with the establishment of the company’s savings plan 50 years ago,� the statement said.