Coke to Buy Back Shares, Drop Ratio on Dividends

Coca-Cola Co., in an bid to strengthen investor confidence, said Thursday that it will begin repurchasing up to 10 million shares of its common stock in transactions that could total about $385 million at the current stock price.

The company also said it planned to increase borrowings and cut the amount it had hoped to pay on dividends to free up more cash for business expansion.

“These actions reflect our confidence in the underlying strengths of this company,” said Roberto C. Goizueta, chairman of the board and chief executive. “We have always viewed share repurchases favorably, and we believe that whenever our excess cash or debt capacity exceeds our near-term needs, such an action is beneficial to our stockholders.”

S&P; to Review Rating

Nevertheless, the move prompted Standard & Poor’s Corp. late Thursday to announce that it would review the credit rating on $300 million of long-term Coca-Cola debt “with negative implications.”

In trading on the New York Stock Exchange Thursday, Coca-Cola stock closed at $38.50, up 62.5 cents.

The buybacks represent only a small fraction of Coke’s 386.9 million shares outstanding, but analysts said the move will likely boost the market value of the outstanding shares of the giant Atlanta soft drink maker.

By reducing the number of shares outstanding, a company’s per-share earnings are figured on a lower base, which raises the amount of money available for each share. “Repurchases usually help the stock price go up,” said John C. Maxwell, a beverage analyst for Furman Selz, who said there was little financial penalty involved for Coke.

Sign of Strength

“Repurchase is beneficial to shareholders,” added Coca-Cola spokesman Eric Riggle. “It indicates that our business is strong.”

Coca-Cola decided to reduce planned dividend increases, breaking ranks with some other large companies that are expected to increase dividends in response to recent changes in federal tax law. Those changes, some of which become effective Jan. 1, impose higher tax rates on long-term capital gains and lower tax rates on dividends and ordinary income.

Coca-Cola said it will limit dividends to 40% of earnings, instead of a previously announced rate of 50%. The dividend policy will not affect the current dividend payment, which is at 26% of earnings.

Goizueta said that the reduction on Coke’s dividend payout ratio will allow the company to enhance future growth.