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The Dark Side of Stock Buybacks: Is the Smart Money Worried?

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There was a time when you'd have been hard-pressed to find a more ardent advocate of buyback programs than Jim Cramer. The Mad Money host touted companies with these programs in place for their ability to reward shareholders, operating under the assumption that buybacks raised stock price and could act as a safety net for a falling stock in a bear market.

But buybacks turned out to be less of a value than Cramer bargained for.

Following the stock market crash of 2008, many companies used their cash to finance buybacks rather than pay dividends out to shareholders, particularly in the health-care sector. This, in spite of the fact that at Aetna, Wellpoint and United Health Care, to name just a few, insiders were simultaneously trying to unload their company stock.

Not only did buybacks fail to give prices the boost companies were banking on, they actually lost out on what would have been a 4% yield had they put the money in dividends instead. As Cramer notes, that's the point at which dividend payers become a lot more attractive to potential investors -- and an upsurge in buying may have given the stock the push company management was looking for in the first place.

So while the CEO party line on buybacks may proclaim their unwavering faith in the company's prospects, the truth is, there are sometimes ulterior motives at play in share repurchasing.

For one, it's an easy way to lift the firm's earnings per share. And companies sometimes use buybacks as a way to attempt to put a bottom on a falling stock, overlooking the reality that a quick fix can't stave off the inevitable.

A company on the skids will continue to see a backslide, regardless of how many Band-Aids they apply.

Does Cramer have a valid point? Perhaps -- but we've found some institutional investors that would disagree with the investing guru. On the contrary, they're snapping up the stocks of companies that have recently announced buyback plans.

Whose side are you on? (Click here to access free, interactive tools to analyze the ideas mentioned below.)

Institutional data sourced from Reuters, buyback data sourced from RTT News. Note: All data sourced on Monday morning, January 20, 2011.



Institutional Transactions

China Cord Blood (NYSE: CO  )

On 9/15 the company announced a buyback program of $15M, representing about 6% of their market cap

Institutional investors currently own 11,359,843 shares vs. 9,170,490 shares held three months ago (+23.87% change)

TeleNav (Nasdaq: TNAV  )

On 11/15 the company announced a buyback program of $20M, representing about 6.5% of their market cap

Institutional investors currently own 10,994,807 shares vs. 9,689,839 shares held three months ago (+13.47% change)

Seagate Technology (NYSE: STX  )

On 11/29 the company announced a buyback program of $2.0B, representing about 30% of their market cap

Institutional investors currently own 425,088,222 shares vs. 380,844,431 shares held three months ago (+11.62% change)

Cninsure (Nasdaq: CISG  )

On 12/3 the company announced a buyback program of $100M, representing about 12% of their market cap

Institutional investors currently own 29,758,946 shares vs. 26,664,483 shares held three months ago (+11.61% change)

Enzon Pharmaceuticals (Nasdaq: ENZN  )

On 12/21 the company announced a buyback program of $200M, representing about 27% of their market cap

Institutional investors currently own 62,996,457 shares vs. 60,734,620 shares held three months ago (+3.72% change)

Gulf Resources (Nasdaq: GFRE  )

On 9/27 the company announced a buyback program of $10M, representing about 3% of their market cap

Institutional investors currently own 7,116,159 shares vs. 6,910,459 shares held three months ago (+2.98% change)

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.

Kapitall's Eben Esterhuizen and Alicia Sellitti do not own shares of any companies mentioned.

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Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 14, 2011, at 5:49 PM, Bobhop62 wrote:

    You guys realize that the majority of the institutional holdings reported as of today would be for 9/30/2010. Roughly only 10% of funds have reported their Dec 31 2010 holdings as of today (if you look at GE its 128 funds out of 1570 funds that have reported, for GFRE which you mentioned only 4 out of 48 funds listed at have reported for the 4th qtr). Any stock buyback announced in the 4th qtr or on 9/27 is not going to be factor in the increased fund holdings for the third quarter.

    Besides that today is Jan 14th and you are mentioning the data was sourced on Jan 20th LOL. Why don't you wait until Feb 15th or March 1 when the majority of funds will have reported, before mentioning this factor and implying that this was perhaps why the funds were snapping up shares.

    At this point your comment that funds are snapping up companies that have announced buybacks is an unrelated factor and misleading.

  • Report this Comment On January 14, 2011, at 6:37 PM, Bobhop62 wrote:

    Its curious the large difference in the data you have that is from Reuters's vs what I can find at the Nasdaq website. Any comments on how Retuers gets their data?

    I know the Nasdaq data is based on the 13F-HR SEC filings that each fund files after each quarter, and have always thought of it as fairly accurate. Now I don't know. I am not familiar with the fund holding data from Reuters, and wonder how Reuter's is generally getting a much larger number here and the timing of their data? One would assume they are using the same SEC filings, but what else are they including, or else would they have generated their numbers. Per Nasdaq funds have around only 5.2 mil shrs of CO, 4.8 mil for TNAV, 365 mil for STX, 24.4 mil for CISG, 55.5 mil for ENZN, and 7.2 mil for GFRE compared to your numbers of 11.4, 11.0, 425.1, 29.8, 63.0 and 7.1 mil respectiviely.

  • Report this Comment On February 01, 2011, at 12:33 AM, TrackSterman wrote:

    Let me get this looked at a total of SIX stocks and drew conclusions? Please stop.

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