Stock buybacks are seen as a bullish sign that management thinks its stock is cheap. Not only can they get a better return by investing in their company, but it's also a way for companies to return capital to shareholders, just like dividends.
A quick take on buybacks
Done right, repurchasing shares increases earnings per share, assuming profits stay at least at the same level. A company with $1 million in earnings and 1 million shares outstanding will have EPS of $1.00. Buying back 250,000 shares so that only 750,000 shares remain outstanding -- and total profits are still $1 million -- means EPS will increase 33% to $1.33 (1 million divided by 750,000 is 1.33).
Buybacks help companies boost earnings per share without any new profit growth. Couple that power with actual expanding profits and you have an explosive combination of earnings-per-share growth. Here's last week's list of buyback contenders.
We're looking for companies that have announced stock buyback programs. Then we'll head over to Motley Fool CAPS to get some insight into what the investing community thinks the best prospects are. If companies announce stock buybacks, and CAPS' top investors endorse their prospects for the future, Fools should take notice.
Here's the latest list of some of the companies to announce share repurchase programs.
|
Company
|
Buyback Announcement Date
|
Amount of Buyback
|
CAPS Rating
|
|
Pre-Paid Legal Services (NYSE: PPD )
|
3/19/2007
|
1 million shares
|
**
|
|
Hewlett Packard (NYSE: HPQ )
|
3/16/2007
|
$8 billion
|
***
|
|
SEI Investments (Nasdaq: SEIC )
|
3/15/2007
|
$50 million*
|
*****
|
|
Southwest Airlines (NYSE: LUV )
|
3/15/2007
|
$300 million
|
***
|
|
NetEase.com (Nasdaq: NTES )
|
3/12/2007
|
$100 million
|
****
|
Source: Company press releases; CAPS ratings courtesy of Motley Fool CAPS.
*Expanded previously announced buyback program
The CAPS advantage
Every day, tens of thousands of investors rank whether thousands of stocks will outperform or underperform the market. CAPS, the Fool's collective intelligence service, takes those ratings from professional and amateur investors alike, overweights the most successful and accurate opinions, and assigns each company a CAPS rating from one to five stars.
So what do Fools have to say?
-
Steve819 feels that NetEase's "in-house dev[elopement] is the way to go in terms of building long-term sustainable competitive advantage," though he's cautious about revenue growth projections.
- Hewlett Packard has a growing fan club. pralden sees it "bulldozing Dell," while maddeitz says HP is "developing services product line, improved cost efficiencies, and a strong CEO -- not to mention they're now the world's biggest seller of PCs."
- Pre-Paid Legal Services doesn't get much love from the CAPS community, where it has a two-star rating, despite three-quarters of the players thinking it will outperform the market.
Tracking their commitment
Later on, we'll follow up and see if they've followed through on their announcements. Just because a company says it's going to repurchase its stock doesn't mean it is obligated to do so. Sometimes companies will announce a share buyback just to prop up the stock price, so we'll check in with them later to see whether they've lived up to their word.
Foolish fallout
You've seen what the companies have said. You've read what the CAPS players think. Now it's time to add your voice. Motley Fool CAPS is a completely free, fun service where you can pit your intellect against tens of thousands of your fellow investors. Click here to sign up today.
NetEase.com is a recommendation of Motley Fool Rule Breakers. Dell is both a Stock Advisor and Inside Value pick. Take any newsletter for a 30-day free trial.
Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
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