Company Stock Buybacks

2006-11-19

Companies have been spending record numbers in stock buybacks in the open market - totaling a record $458 billion in 2005. But what does it say when a company announces they are buying back their stock? Many think it signals that the companies feel the stock is trading at a good value and even hints that the stock may be undervalued. And, with fewer stocks in the open market, investors get a larger share of ownership percentage – thus a higher percentage of the companies’ earnings.

While this may sound good in theory, the reality is a little more complex. With the record buybacks going on, one would think the number of market shares should decease. But despite the record buybacks, aggregate number of shares available in 2005 rose according to USB Securities.

For example, ConocoPhillips spent 1.9 million to buyback shares of it’s stock, but the total number of shares rose 3% from 2004 to 2005 when you compare the cash-flow and income statements of the two years. But there were 80 firms that reduced their number of shares by at least 4% according to Kiplinger’s magazine. Among the companies that reduced their share count is Exxon, Goldman, and IBM.

The reasoning behind the buyback is extremely important. Is the company buying back it’s shares to because unfavorable news has put the stock price in the basement? If the economy is slowing or the industry is maturing, a buyback is a legitimate way for the company to boost it’s return. Or, the company may feel more comfortable investing in it’s own stock, rather than investing in a doubtful or risky expansion.

Buybacks are expected to remain popular for the near future. Many companies will use the repurchased shares to help with further acquisitions. So if a company you have invested in announces a buyback, look to the motivation - good or bad – to gauge what where the company maybe going.

Related Articles:
» Do You Need a Hedge Fund?
» Are You Investing Startegies Up To Date
» What is Your Risk Tolerance?

Copyright 2006 Finance News Today. Articles can not be copied, reproduced or redistributed without written permission from Finance News Today. To request reprint permission please email us at info@financenewstoday.com