Buyback Accountability: Do They Follow Through?

Investors like it when the company they own announces a stock buyback program. Whether it's a new one or one expanding a currently 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 prospects and the smartest investors in Fooldom concur, that ought to get our attention.

Background on buybacks
Just to refresh why we're tracking buyback programs, they can be a powerful driver to earnings-per-share growth.

Say a company with $1 million in earnings has 1 million shares outstanding and EPS of $1.00. 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 power forward.

A recap of CAPS
Now, when we pair up companies who are shrinking their share count with CAPS player opinions, we might be able to identify good potential investments.

What's CAPS? It's the Fool's latest foray into investor intelligence. More than 24,000 professional and novice investors alike rank the thousands of stocks that comprise the stock universe, and CAPS overweights the opinions of the most successful and accurate among them. From that, a CAPS rating is assigned from one to five stars, with five stars being the best.

Follow through
What we're doing today is checking up on whether those companies that have announced a share buyback program 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 is 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.

• Monarch Casino. While the operator of the Reno, Nev.-based Atlantis Casino reported that it has not repurchased any of the authorized 1 million shares (and its share count actually increased slightly), not only have trailing earnings edged up, but the stock has also appreciated 39% since then. It seems management was smart not to buy back shares at these levels.

• Pentair. The water treatment manufacturing company has several buyback programs in place and, since its September announcement, has bought back 336,000 shares at an average price of $27.94 as of Dec. 31. It actually authorized an additional repurchase program at the end of the year but hasn't made any purchases under that plan yet.

• Oakley. The fashion sunglass maker also reported that it has not made any share repurchases under its new program. The 18% increase in the price of its stock may mean that management thinks its shares are not undervalued at these levels and is looking for more favorable market conditions.

• Progress Software. Although the business application software maker announced that a new 10 million share buyback program would start on Oct. 1, it hasn't made any purchases despite flat share prices. Might that have to do with the stock option backdating scandal it's mired in? The Wall Street Journal identified it as one of a number of companies that might have used the collapse in stock prices following the Sept. 11 terrorist attacks as an opportune time to backdate options.

• Colonial Bancgroup. With the stock relatively flat, the regional bank bought back more than 454,000 shares at an average price of $24 per share. With profits also growing, earnings per share are expanding nicely. Considering the dour view that CAPS players have of the stock, might this be a potential surprise investment opportunity?

Foolish final thoughts
We've seen the results so far. Most of the companies have either followed through or have found better uses for their money, considering their rising share price, but maybe not all of them. 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.