Buyback Accountability: Do They Follow Through?

Investors like it when a company whose shares they own announces a stock buyback program. Whether it's a new program or an expansion of an existing plan, stocks of companies often get bid up when they announce share-repurchase programs.

In our "Shrink!" column, we track companies that announce share repurchase programs, along with investor sentiment as revealed by Motley Fool CAPS, our new collective intelligence community. If companies are bullish about their own prospects and the smartest investors in Fooldom concur, then that ought to get your attention.

Background on buybacks
The reason we're tracking buyback programs is that they can be a powerful driver to earnings-per-share growth. For instance, say a company with $1 million in earnings has 1 million shares outstanding and EPS of $1. If it buys back 250,000 shares so that only 750,000 shares remain outstanding -- and total profits are still $1 million -- then its new EPS will be $1.33 (1 million divided by 750,000 is 1.33). This company increases its EPS by 33% without doing anything more than buying back its shares. When we couple that with increased profitability, EPS can really move up in a hurry.

By itself, tracking buybacks can give you some good investments. But if you combine that knowledge with the opinions of 25,000 CAPS players, you might be able to identify truly outstanding potential investments.

Follow through
Today we're checking whether those companies that announced share buyback programs are following through on their promise. Just because a company announces a buyback doesn't mean it actually has to repurchase any.

That may be for a couple of reasons -- some good, some bad. Companies know just like we do that the markets like a buyback announcement. Sometimes, they'll say they're going to buy back shares just to prop up the price of their stock. That would obviously be one of the bad reasons.

Other times, after an announcement, the share price goes up and management doesn't feel that buying back stock is the best place for its money. The stock is no longer undervalued, so they wouldn't be getting the best return on their money. That would be a good reason not to buy back shares.

Here's a list of companies that announced buyback programs and what's happened since. We also check in with Motley Fool CAPS to see how investors feel.

While it looks like most companies are following through on their commitment, Arch Coal's share count went up by nearly 5% since the program was announced. Considering that its share price has risen nearly 15% while earnings are up nearly 70% on a trailing basis, investors probably aren't complaining if stock option grants were the cause. When management produces market-beating results -- the S&P 500 was up only 8% in that same time period -- they often deserve the rewards they receive.

Here's what CAPS players are saying about these companies:

Back in December, top-rated all-star gtowings said, "Here's a burning reason to take this stock and shovel it into my CAPS portfolio: It's cheap. Arch, the nation's second-biggest coal producer, has 3.1 billion tons of coal reserves and a stock market value of $5 billion, or just $1.60 a ton ... Arch points out that many of its contracts expire soon and that many of its new contracts call for prices of up to 25% more than those in the pacts they're replacing."

Michael2k adds, "One warm winter does not deflate the energy sector. Technology (and everything else) depends on it. With 50+% of our electricity being fed by coal, I can't see how coal companies can't profit in the next year. ACI's advantage is cleaner coal."

Texas Instruments bear and all-star CAPS player jwfoster contends, "Too much inventory, declining margins, poor product mix, declining prices on everything HD, etc. It's all over but the crying for TXN longs. I will be shocked if this stock is over $25 by year's end."

Foolish final thoughts
Most of the companies that announced share buyback programs have either followed through or found better uses for their money in light of their rising share price. But that doesn't mean they'll provide market-beating returns in the long run. We've also seen how the best CAPS players have weighed on these stocks. Now it's your turn.

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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.