5 More Undervalued Stocks Getting Bought Back

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, as long as profits stay at least at the same level. A company with $1 million in earnings and 1 million shares outstanding will have 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.

The CAPS advantage
Investors at CAPS are feeling pretty excited about this selection of stocks announcing buyback programs, with all five companies earning top ratings of four and five stars. One of those top-rated companies, managed-care provider Healthways, got a clean bill of health for its core commercial business. It's been aggressively growing through organic initiatives and acquisitions, but it recently coughed up a lung following its participation in a pilot program to contain Medicaid costs.

Yet the worst that can be said of the Motley Fool Stock Advisor recommendation on CAPS is that perhaps it's a bit pricey. Top-rated All-Star SureBeatsWorking notes:

Playing to a demographic trend and providing specialized services for an unfortunate growing number of people with diabetes, heart ailments and kidney problems and a growing population. Small Market cap $1.6B-Smaller company with room for growth. I held this company for a few years and watch it climb into the 50s only for it to fall right back down again! It's definitely a pricy stock with multiples. It also carries $330M of debt from acquisitions. It also has a small customer base. There are definitely risks with this company.

With little meaningful competition, however, he views it as a "long term keeper."

Fellow Stock Advisor recommendation Charles Schwab not only agreed to buy back $2.3 billion worth of stock, but will also pay a $1 per-share dividend valued at $1.2 billion. After successfully selling a subsidiary, Schwab's coffers are filled to overflowing.

Still, a better bet might be pharmaceutical and consumer products giant Johnson & Johnson, which announced a huge $10 billion share buyback program. While the pharmaceutical business brings home the bulk of the revenues and some may have concerns about the depth of its pipeline, this Motley Fool Income Investor selection has a deep portfolio of consumer products that allows it to build on its earlier stumbles.

Another CAPS All-Star, goalie37, who outranks almost 90% of all other investors, is enamored of Johnson & Johnson's breadth of product offerings and ability to increase shareholder value.

If strong, stable, monster-sized companies are known as "blue chips", Johnson and Johnson will need a new word to show how blue it is ("Azure Chip?" "Lavender Chip?"). This $191 billion dollar company sports a 2.2% dividend that has grown every year as far back as my research allows. The 14 cent payment in 2000 is now sitting at 33 cents. The P/E sits at a not unreasonable 17 multiple. As of the end of 2005, the company sat on $16 billion in cash, with another $7 billion in receivables. From 2001 to 2005, long term debt shrank from $2.2 billion to $2.0 billion. Over the same time period, retained earnings jumped from $23 billion to $41 billion. In the last five years, outstanding shares even dropped (although not by much.) I could go on and on, but hopefully I have said enough for you to do your own DD.

What's your take? Is health care going to be the undoing of Healthways and Johnson & Johnson, or will both remain physically fit?

Foolish fallout
Now it's time to add your voice. Bull or bear, Motley Fool CAPS is a completely free, fun service where you can pit your intellect against thousands of your fellow investors. Click here to sign up today.

Healthways and Charles Schwab are recommendations of Motley Fool Stock Advisor. Johnson & Johnson is a recommendation of Motley Fool Income Investor. NetEase is a recommendation of Motley Fool Rule Breakers.

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.