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Tellabs Boosts Shareholders' Wealth

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Telecom equipment manufacturer Tellabs Inc. has decided to enhance its shareholders’ wealth for the second time in the last 10 days. Business enterprises generally adopt two ways to raise their shareholders’ return: (1) share buyback program, and (2) dividend initiation or hike program.

Yesterday, the Board of Directors of Tellabs has decided to pay a special dividend of $1 per share. The dividend is payable on December 21, 2012, to stockholders of record as of the close of business on December 14, 2012. This special dividend will cost the company approximately $368 million. Earlier, on November 20, Tellabs announced a share buyback program worth $224.6 million (consisting of about 22.5% of the company’s outstanding shares).

Tellabs has got sufficient cash to carry out these two programs. The company exited the third quarter of fiscal 2012 with $941.8 million of cash & marketable securities with no debt outstanding. So, the company’s plans to repurchase shares after a gap of seven quarters along with a special dividend payment will not only boost its share prices but will also drive the company’s earnings per share in the years to come. As a matter of fact, in the after-market trade in NASDAQ, yesterday, the share price of Tellabs went up 34 cents (11.53%) to $3.29.

Meanwhile, despite meeting the Zacks Consensus Estimates, Tellabs reported dismal financial results for the recently concluded quarter, where all the segments experienced revenue declines along with a loss in earnings. Moreover, the company also presented a somber outlook for the next quarter. Such poor performances were mainly attributable to increasing competition in its core wireless backhaul solutions segment and loss of a major client like AT&T Inc. (T - Free Report) from its limited customer portfolio.

Such poor showdown by Tellabs was also reflected on its share price movement recently, where the company shares hit a 19-year low last week. We believe that in order to regain investor’s faith as well as to maximize their wealth, the company reverts back to share buy-back and special dividend program, which will also drive share prices.

Nevertheless, it is yet to be seen how long the company can restore the investors’ faith by means of buying back shares and paying dividends instead of generating profit form the business. We maintain our long-term Neutral recommendation on Tellabs. Currently, it has a Zacks #3 Rank, implying a short-term Hold rating on the stock.

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