Buybacks, or share repurchases, are when a company starts to purchase its own stock, taking it off the market. Doing so lessens the number of outstanding shares held by the public. The buying pressure tends to increase the value of the shares, as does the fact that there are now fewer shares outstanding.
Another side effect: Given the decreased number of shares, earnings per share will increase if profits remain unchanged.
Lowe's stock has fallen 23% this year and buybacks are expected to lessen the hit. $5 billion in buybacks currently represents about a fifth of the market share. If Lowe's shares are currently undervalued, a rally in company profits will mean strong return on investments for the firm.
Lastly, buying up stocks reduces the cash lying around the company. Having cash tied up in equities can look more attractive on a company's balance sheet and make it less attractive of a takeover target. (Free cash transfers to the acquiring company. This essentially lowers the actual cost of acquisition.)
It should be noted that companies are no better than the average investors at repurchasing their own stocks with the "buy low, sell high" mentality.
Interested in analyzing the buyback scene?
We list below some of the big companies that recently announced buybacks. Do you think there are any undervalued names among them? (Click here to access a list of free, interactive tools to analyze these ideas.)
1. AECOM Technology
2. Cognizant Technology Solutions
3. Corrections Corporation of America
4. Forest Laboratories
5. Henry Schein
6. Marsh & McLennan Companies
7. Maxim Integrated Products
8. Myriad Genetics
9. Riverbed Technology
10. Westlake Chemical
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.
Kapitall's Becca Lipman does not own any of the shares mentioned above. Data sourced from Finviz.
Motley Fool newsletter services have recommended buying shares of Lowe's Companies, Riverbed Technology, and Corrections Corporation of America. Motley Fool newsletter services have recommended writing covered calls in Lowe's Companies. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.