Stock buybacks are generally considered a bullish signal on Wall Street. They announce management's belief that its stock is cheap, and that its own shares will provide its best return on investment. Like dividends, buybacks also let companies return capital to shareholders.
How buybacks work
Done right, share repurchases will increase earnings per share, so long as profits stay at least at the same level. A company with $1 million in earnings and 1 million shares outstanding will have an EPS of $1. Now, if it buys back 250,000 shares, leaving only 750,000 shares outstanding -- and total profits remain $1 million -- its new EPS would be $1.33, or $1 million divided by 750,000.
We're seeking companies that have announced stock buyback programs. Then we'll head over to Motley Fool CAPS to get some insight into the investing community's preferred picks. If companies announce stock buybacks, and CAPS' top investors endorse their future prospects, 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) |
|---|---|---|---|
|
Dominion Resources |
6/28/2007 |
55 million shares |
** |
|
Developers Diversified Realty |
6/28/2007 |
$500 million |
* |
|
Digital River |
6/27/2007 |
$200 million |
*** |
|
Best Buy |
6/27/2007 |
$5.5 billion |
*** |
The CAPS advantage
Investors at CAPS are feeling pretty sanguine about this selection of stocks announcing buyback programs. While only real estate investment trust Developers Diversified was left holding the bag with a one-star rating, none has generated more than three stars. Although the REIT is focused on shopping malls and commercial centers, the slowing real estate market will have an impact, as CAPS All-Star iLikePie writes:
Recent downgrade by Deutsche, slightly slowing economy resulting in less retail spending, which in turn results in slower expansion and development of retail shopping centers ... this co's primary arena.
A better bet might be either leading outsourced e-commerce provider Digital River, or electronics superstore and Motley Fool Stock Advisor recommendation Best Buy, both of which garnered more favor with the CAPS community. The River's stock suffered something of a setback, after it scaled back second-quarter guidance because of delays in implementing products from both Symantec
Top-rated CAPS investor Zefur sees Digital River as a growth stock for some time to come:
Thought of as a middleman for downloading mostly anti-virus software, the ever-present short-seller has been consistently wrong on this stock for more than five years. And they still don't get it. Valuation remains at about 1/2 of what it should be given its cash flow, market position and growth outlook.
DRIV is a dominant provider of marketing and back-office operational services for selling software over the internet. Broadband adoption multiplies DRIV's potential, allowing for ever-larger software programs to be downloaded rather than purchased at retail, while also expanding the end-user customer base. The pct of software downloaded versus purchased at retail remains low, but the incentive for software publishers to sell downloadable versions (and earn better margins) has never been stronger. Until 75%-80% of all software is sold as a download, DRIV will remain a growth stock.
CAPS All-Star SureBeatsWorking, with a player rating that exceeds 99.37% of all other investors, sees Best Buy as a strong, steady, consistent grower that is putting all of its main rivals to bed:
With companies like Tweeter, Circuit City and Comp USA closing stores around me left, right and center, BBY keeps on chugging along. Circuit City never seems to have any good things to report either, once the market leader in consumer electronics, Best Buy now holds this mantle. This company seems to have the innovation that [its] competitors lack.
The removal of this competition is good, but the main threat seems to be coming from online stores with some threat from the big box stores such as Walmart. This is Best Buys biggest threat.
... With a market cap of 21B it is a bit larger than the companies I like to invest in. This one is going to be a steady grower over the long term. No huge growth spurts like some of the small cap companies. This is definitely a 5 year plus long term buy and hold.
What's your take? Is Digital River still a best buy? Will Best Buy continue to sail on a river of growth?
Foolish fallout
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Fool contributor Rich Duprey owns shares of Digital River, but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. Symantec and Microsoft are Motley Fool Inside Value picks. The Motley Fool has a disclosure policy.
