The Dark Side of Stock Buybacks: Is the Smart Money Worried?

There was a time when you'd have been hard-pressed to find a more ardent advocate of buyback programs than Jim Cramer. The Mad Money host touted companies with these programs in place for their ability to reward shareholders, operating under the assumption that buybacks raised stock price and could act as a safety net for a falling stock in a bear market.

But buybacks turned out to be less of a value than Cramer bargained for.

Following the stock market crash of 2008, many companies used their cash to finance buybacks rather than pay dividends out to shareholders, particularly in the health-care sector. This, in spite of the fact that at Aetna, Wellpoint and United Health Care, to name just a few, insiders were simultaneously trying to unload their company stock.

Not only did buybacks fail to give prices the boost companies were banking on, they actually lost out on what would have been a 4% yield had they put the money in dividends instead. As Cramer notes, that's the point at which dividend payers become a lot more attractive to potential investors -- and an upsurge in buying may have given the stock the push company management was looking for in the first place.

So while the CEO party line on buybacks may proclaim their unwavering faith in the company's prospects, the truth is, there are sometimes ulterior motives at play in share repurchasing.

For one, it's an easy way to lift the firm's earnings per share. And companies sometimes use buybacks as a way to attempt to put a bottom on a falling stock, overlooking the reality that a quick fix can't stave off the inevitable.

A company on the skids will continue to see a backslide, regardless of how many Band-Aids they apply.

Does Cramer have a valid point? Perhaps -- but we've found some institutional investors that would disagree with the investing guru. On the contrary, they're snapping up the stocks of companies that have recently announced buyback plans.

Whose side are you on? (Click here to access free, interactive tools to analyze the ideas mentioned below.)

Institutional data sourced from Reuters, buyback data sourced from RTT News. Note: All data sourced on Monday morning, January 20, 2011.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.

Kapitall's Eben Esterhuizen and Alicia Sellitti do not own shares of any companies mentioned.