Kroger 2015 Annual Report Download - page 71

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69
Item No. 7 Shareholder Proposal
We have been notified by one shareholder, the name and shareholdings of which will be furnished
promptly to any shareholder upon written or oral request to Kroger’s Secretary at our executive offices,
that it intends to propose the following resolution at the annual meeting:
Shareholder Proposal
Share Repurchase vs. Dividend
“Resolved: Shareholders of The Kroger Co. ask the board of directors to adopt and issue a general
payout policy that gives preference to share repurchases (relative to cash dividends) as a method
to return capital to shareholders. If a general payout policy currently exists, we ask that it be
amended appropriately.
Supporting statement: Share repurchases as a method to return capital to shareholders have distinct
advantages relative to dividends. Share repurchases should be preferred for the following reasons:
1) Financial flexibility. Four professors from Duke University and Cornell University studied
executives’ decisions to pay dividends or make repurchases by surveying hundreds of
executives of public companies. They found that “maintaining the dividend level is on par
with investment decisions, while repurchases are made out of the residual cash flow after
investment spending.”1 Further, in follow up interviews as part of the study, executives “state[d]
that they would pass up some positive net present value (NPV) investment projects before
cutting dividends.” The creation of long-term value is of paramount importance; I believe that
repurchases have the distinct advantage that they do not create an incentive to forgo long-term
value enhancing projects in order to preserve a historic dividend level.
2) Tax efficiency. Share repurchases have been described in the Wall Street Journal2 as “akin
to dividends, but without the tax bite for shareholders.” The distribution of a dividend may
automatically trigger a tax liability for some shareholders. The repurchase of shares does not
necessarily trigger that automatic tax liability and therefore gives a shareholder the flexibility to
choose when the tax liability is incurred. Shareholders who desire cash flow can choose to sell
shares and pay taxes as appropriate. (This proposal does not constitute tax advice.)
3) Market acceptance: Some may believe that slowing the growth rate or reducing the level of
dividends would result in a negative stock market reaction. However, a study published in the
Journal of Finance finds that the market response to cutting dividends by companies that were
also share repurchasers was not statistically distinguishable from zero.3 I believe this study
provides evidence that there is market acceptance that repurchases are valid substitutes
for dividends.
Some may worry that share repurchases could be used to prop up metrics that factor into the
compensation of executives. I believe that any such concern should not interfere with the choice of
optimal payout mechanism because compensation packages can be designed such that metrics are
adjusted to account for share repurchases.
In summary, I strongly believe that adopting a general payout policy that gives preference to share
repurchases would enhance long-term value creation. I urge shareholders to vote FOR this proposal.”
1 http://www. sciencedirect.com/science/article/pii/S0304405XO5000528
2 http://www.wsj.com/articles/companies-stock-buybacks-help-buoy-the-market-1410823441
3 http://www.afajof.org/details/journalArticle/2893861/Dividends-Share-Repurchases-and-the-
Substitution-Hypothesis.html