Who's Buying Back Shares?

American corporations have been busy buying back lots of their own shares on the open market. According to Standard & Poor's, the preliminary buyback total for 2007 is $589 billion, up 36% over 2006 (and up a whopping 350% since 2003).

What's going on? Well, look at the condition of our stock market. It's hardly been rocketing lately, with the S&P 500 gaining just 5% in 2007 and shedding 2% so far in 2008. The shares of many companies have dropped significantly. (Occasional drops are not a cause for concern with healthy, growing companies. When the tide comes back in, it will lift most boats.)

Here's the bottom line with stock buybacks: They make sense when a company is buying its shares at an attractive price, and they're dumb when the company is buying overvalued shares. Any money a company spends should be spent as effectively as possible. If it can't find more attractive options for its excess cash, such as buying other companies, paying down debt, building factories, or buying more advertising, then stock buybacks can make a lot of sense.

According to S&P, here are the 10 biggest repurchasers of 2007, along with how much they spent on shares, in billions:

Source: S&P.

So given these companies' stock performance, do these purchases make sense? Many do. Home Depot shares fell about 31% in 2007. Pfizer's fell 8%, while General Electric's rose just 3%.

Just what effect do buybacks have? Well, consider ExxonMobil. According to Morningstar.com, its shares outstanding dropped from 5.6 billion in 2006 to 5.4 billion in 2007, a 4% decrease. That means each share you own represents a slightly larger piece of the company.

Think of what happened in terms of pizza: If you cut it into fewer pieces, each one will be bigger. Your ExxonMobil shares are each 4% plumper, after the company's share count is reduced.

Pay attention to stock buybacks -- they might boost the value of your shares. You can learn more about buybacks in this article.