Stock buybacks are generally considered a bullish signal on Wall Street. They return capital to shareholders, while declaring management's belief that its own cheap shares are its best return on investment. As long as profits remain consistent, share repurchases can even increase earnings per share, by dividing the same amount of earnings among a smaller pool of shares outstanding.
Today, we find two more companies that announced new or expanded stock buyback programs, and we'll consult with Motley Fool CAPS to see which of those firms the 180,000-strong investor community favors most. If CAPS' top investors endorse the prospects of companies announcing buybacks, maybe Fools should take notice.
But don't forget -- a company isn't obligated to repurchase shares just because it announced its intention to do so. So don't use a buyback announcement as a reason to buy by itself, rather use it as a launching pad for additional research.
More, more, more!
It was just three months ago that Seagate Technology
Unlike rival drive makers Western Digital
Seagate and Western Digital own 90% of the drive market, with Toshiba allotted the rest. Incredibly, though, both leaders are screaming values. When the market dropped their stocks the other day in response to Western Digital's earnings numbers -- it was a blowout quarter, but investors feared pricing (and profits) would soften going forward -- I'd say that was a buying opportunity. I'd also say that window remains wide open.
Analysts are unanimous in their belief that Seagate will continue beating the indexes, as are 92% of the 1,200 CAPS members who've weighed in on the storage specialist. I've rated it to outperform as well. Add Seagate to your Watchlist and let me know in the comments section below or on the Seagate Technology CAPS page if this latest buyback announcement indicates management also thinks its stock is cheap.
Reduce, reuse, recycle
In wondering what Warren Buffett sees in US Bancorp
The company has prudent underwriting practices and a strong balance sheet. Its Basel II Tier 1 common equity ratio is 8.4%, exceeding the proposed 7% minimum. The strong capital position provides US Bancorp with the flexibility of buying back shares as well as capturing other opportunities.
Yet like Buffett, Meena still favors conservatively run rival Wells Fargo
The current authorization it announced is for 100 million shares, so it should last for a while, but it's worth noting that USB isn't retiring the shares it's repurchasing, but holding them instead in treasury so that it can issue them again for corporate purposes. To me that's a less favorable use of buybacks since it allows a company to continue diluting its shares over and over again. Wash. Rinse. Repeat. In US Bancorp's case, that would be at higher and higher stock prices. Shares are up 20% this year and with analysts expecting earnings to grow 15% this year, we're likely to see them expand in value further.
CAPS member FoolishMikee points out a paradox that during the recession, when its share price was slashed, US Bancorp didn't buy back any shares. But he agrees with Meena that the bank is otherwise a rock-solid investment. "It sticks to its business model of four main segments, deals for its clients and does not engage in any exotic securities that take longer than fifteen minutes to explain."
What's your view on companies buying back shares only to reissue them? Are they wasting shareholder capital, or is it a smart way to structure the business? Tell me in the comments section below then add USB to the Fool's free portfolio tracker to see if it makes good on its promises.
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Fool contributor Rich Duprey owns shares of Intel, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Western Digital and Intel. The Fool owns shares of and has created a covered strangle position in Wells Fargo. Motley Fool newsletter services have recommended buying shares of Wells Fargo and Intel. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.