Several large, well-known companies have recently announced hefty stock buyback plans -- which tend to be good news for investors.
For starters, there's IBM (NYSE:IBM), where the board of directors has authorized the buying back of up to $4 billion in stock. (In stock buybacks, shares are bought by the company on the open market or in private deals and are then essentially retired, reducing the total share count. With fewer shares in existence, each remaining share represents a bigger piece of the company, benefiting shareholders. Imagine a pizza somehow being redivided into six pieces instead of eight -- each piece would be bigger.)
Drug giant Pfizer (NYSE:PFE) has authorized buybacks of up to $5 billion over the coming year, following a $5 billion buyback that ended in 2003. Viacom (NYSE:VIA) has topped IBM, announcing plans to buy up to $8 billion of its shares, while also boosting its dividend by 17%. (Looking for strong dividend-paying stocks? Check out a free trial of our Motley Fool Income Investor.)
What do these firms have in common? Well, somewhat troubled stock prices, for one thing. Pfizer shares have been trading near $30, off a 52-week high of nearly $40. IBM shares have been approaching $90 over the past few months, after having hit $100 back in February. Viacom shares have been trading in the $30s recently, after hitting $45 back in January. Their stock buybacks are likely designed to boost investors' confidence and the share price, too.
Buybacks aren't always good for investors, though. The shares being bought should be trading at attractive levels. If a firm buys its undervalued shares, it has snapped up a bargain for investors. If it's buying overvalued shares, it's squandering shareholder money that could be more effectively spent elsewhere or simply delivered to investors in the form of dividends.
Learn more about buybacks in the Zeke Ashton article, Buybacks: The Invisible Yield.
L ongtime Fool contributor Selena Maranjian owns shares of Pfizer.
