Question: No one is talking about stock buybacks these days. I’ve always thought these were good investments. What’s happening?

Sam Parker

Dear Sam,

A little background…

The value of a buyback for investors varies, depending upon the purpose for the buyback. A company may repurchase some of its outstanding shares to block an unfriendly takeover, or it may be done to increase earnings per share by reducing the number of outstanding shares.

Often a buyback indicates that the company’s cash flow is improving and that management views its company’s stock as undervalued by the overall market.

Companies may also buy back their shares to have them available for employee stock ownership programs and for executive stock options.

The current situation… 

Standard & Poor’s recently announced that S&P 500 stock buybacks are at their lowest level since the company started tracking this data  -- and that was early in 1998. During the second quarter of this year, companies spent $24.2 billion on repurchases. That is 72% less than in the second quarter of 2008.

Howard Silverblatt, a senior analyst at Standard & Poor’s, explained: “Buybacks have become few and far between…as corporations continue to build up cash reserves to ride them through and out of the recession.” 

However, even though the numbers are down, (169 buybacks in the second quarter of 2009 versus 228 in the second quarter of 2008), several major corporations did execute buybacks. The energy sector was the most active, accounting for 22.1%.

Researching the scene…

You expressed an interest in using buybacks as an investment tool. To find out which companies recently executed buyback programs and which are doing so currently, visit: www.marketattributes.standardandpoors.com.