9 Stocks Shrinking Shares

Stock buybacks are generally considered a bullish signal on Wall Street. They return capital to shareholders, while declaring management's belief that its own cheap shares are its best return on investment. As long as profits remain consistent, share repurchases can even increase earnings per share, by dividing the same amount of earnings among a smaller pool of shares outstanding.

Today, we'll draw up a list of companies that have announced stock buyback programs, then consult Motley Fool CAPS to see which of those firms the 110,000-strong investor community favors most. If CAPS' top investors endorse the prospects of companies announcing buybacks, Fools should take notice.

Here are some of the latest companies to announce share repurchase programs.

Company

Buyback Announcement Date

Amount of Buyback

CAPS Rating (out of 5)

Digital Ally (Nasdaq: DGLY  )

June 30

$10 million

*****

Somanetics

July 1

$45 million

****

ConAgra Foods (NYSE: CAG  )

July 1

$900 million

***

Ambac Financial (NYSE: ABK  )

July 3

$50 million

*

NightHawk Radiology (Nasdaq: NHWK  )

July 8

$10 million

****

Paccar

July 8

$300 million

****

Tyco International (NYSE: TYC  )

July 10

$1 billion

***

Wynn Resorts (Nasdaq: WYNN  )

July 10

$500 million

**

Fastenal (Nasdaq: FAST  )

July 10

1 million shares

***

Grubb & Ellis

July 11

$25 million

**

Sources: Company press releases; Motley Fool CAPS.

Investors at CAPS appreciate this group of companies announcing buyback programs; most have received ratings of three stars or better. Yet it should be noted that just because a company has announced a buyback program doesn't mean it has to follow through. A company is not obligated to repurchase shares just because it has announced its intention to do so.

Buybacks have been partially fueled by the easy credit policies of the past few years. Companies didn't mind borrowing big bucks to repurchase their shares, even if they were trading at all-time highs. According to Dealogic, there were $538 billion in buybacks last year among S&P 500 companies, with $138 billion in the fourth quarter alone. Yet announced buybacks in the first quarter of 2008 have slumped to just $76 billion. With credit policies tight, we may see far fewer share repurchase programs in 2008 -- or more companies issuing shares to raise money.

Insuring against what?
Shares of insurer Ambac Financial surged the other day when it reported that the amount of money it was required to post to cover its guaranteed investment contracts (as a result of losing its AAA bond insurance rating) was much less than anticipated. The troubled insurer is also hoping to infuse its Connie Lee subsidiary with new capital as it starts a new business of guaranteeing municipal debt and global infrastructure deals.

Considering its shaky financial foundation right now, what's Ambac doing announcing it wants to use $50 million to buy back shares? Over the past five years alone, Ambac has repurchased more than $958 million worth of stock. What would shareholders give to have that money back to shore up the company's finances today?

Yet investors like CAPS members AhhHaleNo see more upside at this stage than risk, and they see the buyback, when coupled with other factors, as making the immediate future more promising:

Company has taken positive steps to start up a dormant subsidiary to write new policies upon receiving the AAA rating. A buy back was annonced for some of the shares that were offered in early spring of 2008. Insider buys continue and .... The insurance comisioner in NY, where they are HQ'd, looked upon the buy back favorably. Fed. announced aid to Freddie and Fannie indirectly lends support to this company.

Breaking up is hard to do
Motley Fool Inside Value recommendation Tyco International is another company that has been buying up its shares. Just last September, it authorized a $1 billion repurchase program, which is almost exhausted; the current one will add to that. Based on current share prices, that would equal about 5% of the company's outstanding stock.

Top investors like CAPS All-Star TMFDeej find the conglomerate attractive based on the sum of various undervalued parts:

Tyco should be able to improve its margins in both its ADT and Flow Control businesses. Flow Control is undervalued. It sells its products in a number of hot sectors, including oil and gas, power, waste, and water and 75% of that business is outside of the United States. If the market doesn't begin to realize the value of this division, Tyco could eventually spin it off like it did with Covidien (COV) and Tyco Electronics (TEL).

Foolish fallout
You've heard from your fellow investors -- now it's your turn. Motley Fool CAPS is a completely free, fun service where more than 110,000 investors have their say every day. Sign up for CAPS today, and share your best pitch for why your favorite stock will beat or lag the market.

Somanetics and NightHawk Radiology are Motley Fool Hidden Gems Pay Dirt selections. Tyco is an Inside Value pick. Paccar is a Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey does not have a financial position in 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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