House of Fabrics to Buy Back 16% of Shares, End Dividend

House of Fabrics plans to scrap its dividend and to buy back an additional 16% of its common stock.

A last quarterly dividend of 12 cents a share, payable July 2 to stockholders of record June 8, will be paid, said the Sherman Oaks-based concern. It is the nation’s largest chain of retail fabric stores, with 625 outlets.

House of Fabrics’ board also authorized management to periodically buy up to 1 million shares on the open market or through private transactions. Recently, the company bought back 494,800 shares at an average price of $18.20 a share.

The board took the latest actions because it believes that the stock buyback, by giving stockholders a greater stake in the company, outweighs the benefits of a “modest cash dividend,” Gary L. Larkins, president and chief executive, said in a statement.

The dividend, at 48 cents a share annually, provides stockholders with a 3% yield and had cost House of Fabrics about $3 million a year. Comparatively, the average for Standard & Poor’s 500 stocks is 3.5%. House of Fabrics has 6.2 million common shares outstanding.

“By eliminating future cash dividends, we will be able to reduce debt and pay the increased interest costs on debt incurred in the stock repurchase program,” Larkins said.

House of Fabrics’ long-term debt accounts for a relatively low 9% of its total capitalization, and that could increase to about 30% after the company finances the stock buyback, said Robert K. Hedrick, an analyst with the investment firm Eppler Guerin & Turner in Dallas.

He said management apparently believes that “the stock was pretty cheap and thought it was a good time to buy it,” adding that the buybacks effectively would give House of Fabrics’ shareholders about 22% more value for their remaining shares.

The company’s stock has risen in response to the board’s actions. The stock, which stood at $17 a share before the announcement Wednesday, closed Monday at $17.875 in New York Stock Exchange composite trading.

The stock is well below its 52-week high of $25, however, following the company’s earnings slump in the first half of 1989. House of Fabrics appears to have rebounded since, with its fiscal fourth-quarter profit having risen 18% from a year earlier. But its earnings for the full year that ended Jan. 31 still slipped 3%, to $11.1 million, as sales rose 6% to $357.4 million.

The stock buyback should also bolster House of Fabrics’ earnings per share for the present year by reducing the number of shares outstanding.