By
John Grgurich
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September 20, 2011
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Conventional wisdom holds that shareholders love stock splits, but here at The Motley Fool, we like companies that add value by making smart share buybacks. And the recent market upheaval has seen many companies taking advantage of lower prices to indulge in some share retirement.
Everybody's doing it
Companies all over the corporate map are on a share-buyback binge, according to the Financial Times:
- Pharmaceutical giant GlaxoSmithKline (NYSE: GSK ) bought an average of 2.3 million shares every day during the week of July 25.
- Internet stalwart AOL (NYSE: AOL ) announced a $250 million buyback program on Aug. 11, after its shares plunged that week.
- International mining group Rio Tinto (NYSE: RIO ) bought back $310 million worth of shares in the week following Aug. 4.
- Cell-phone operator Vodafone (Nasdaq: VOD ) bought an average of 30.2 million shares per day from Aug. 8 through Aug. 11. The week preceding the market correction, it entered the market just once to buy 4.4 million shares.
- On Aug. 11, Gol (NYSE: GOL ) , Brazil's second biggest airline, said it would buy up 10% of its preferred shares in a self-professed bid to "add shareholder value" because of "the current price of the shares on the market."
Splits are so yesterday
When a company splits its stock, it increases the number of its shares available in the market and proportionately adjusts the share price. Splits can come in the typical 2-for-1 variety, but they can also be 3-for-2, 5-for-4, 3-for-1 -- just about any way the company wants to do it.
Regardless of how the company does it, the result is the same: zero real change in the shareholder's invested value. Investors have more shares in their brokerage accounts, but no additional value is created.
When a company buys back shares, it concentrates investor value. And when the company buys back shares on a regular basis, it's telling the investing world it's a profitable company with cash to spare -- cash that's being put to good shareholder use.
We should reiterate that we want management to buy back shares when they're cheap, not expensive. Yes, management really has been known to buy back shares when they're expensive.
Keep a Foolish eye peeled
"There are few things so sweet as the company that can afford to buy back its stock on the open market and retire the shares."
--Tom Gardner, Motley Fool co-founder
The stock market isn't working properly, isn't doing its job, unless money is returned to the shareholder. Fundamentally, we expect money -- value, if you will -- to come back to us from the stock market. It's the reason we invest.
Stock splits, applauded by the un-Foolish, create no additional shareholder value. Opportunistic stock buybacks, applauded by Fools everywhere, increase shareholder value.
So the next time you're evaluating a company, consider whether it regularly buys back shares -- something typically announced in the quarterly earnings press release. It's one more sign you're looking at a company worth investing in.
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