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Keep Track of Smart Stock Buybacks

Dan Caplinger
September 18, 2012

Many companies use stock buybacks in order to boost their shares and return excess capital to shareholders. Even in an environment where dividend payments are seen as the preferred method of rewarding shareholders, stock buybacks theoretically should achieve the same end of boosting share prices while avoiding the excess tax liability for shareholders that dividends create.

Stock buybacks have gotten a bad reputation, though, because so many companies buy their shares back at the worst possible times. Yet as a recent SmartMoney article suggested, a simple screen looking for those companies that actually spend their money when their share prices are unusually low can make a huge difference in a stock's future performance following a buyback.

The worst of times
A few months back, Fool contributor Morgan Housel took a look atJPMorgan Chase's (NYSE: JPM  ) track record of buybacks. Having bought back billions of dollars of stock in mid-2011 immediately before a 25% drop in its share price, JPMorgan found itself without spare cash to take advantage of the sudden bargain. Then earlier this year, the company authorized an even bigger buyback, yet it suspended it in the wake of the London Whale scandal, thereby again missing a chance to pick up its shares on the cheap.

Nor are banks the only offenders here. A more recent article detailed the share repurchase activity of tech giants. With Hewlett-Packard (NYSE: HPQ  ) , Dell, and Cisco Systems (Nasdaq: CSCO  ) having effectively burned billions of dollars on badly timed buybacks, it's easy to conclude that companies just don't have any idea what they're doing when they authorize repurchases of their shares.

Why not try value?
The saddest thing about these companies is that their buybacks didn't have to be unsuccessful. A little bit of patience would have given them much better opportunities to put their money to work.

For instance, consider Seagate (Nasdaq: STX  ) and Western Digital (Nasdaq: WDC  ) . Both companies have rock-bottom earnings multiples at the moment, as investors fear that the rise of solid-state drives will eventually lead to their h