Superstar investor Warren Buffett, who is CEO of Berkshire Hathaway, created some buzz last September when he announced that the company would buy back its own stock—the first time that it has done so. Further, stock buybacks among the companies that are in Standard & Poor’s 500 index are up by 41 percent over 2010, according to S&P.
Although buybacks typically are considered to be a positive sign for a stock’s value—after all, a company should know whether its stock is undervalued—what you might not realize is that buybacks aren’t always a great indicator of a company’s potential stock performance. Ben Silverman, who is publisher of InsiderScore.com, which tracks corporate insiders’ activities, says some buybacks are designed simply to offset dilution from stock awards that are given to employees, because the company wants to keep the same number of shares in the market.
However, not all companies are good buyers of stock. For example, Citigroup, (NYSE: C) bought more than $1 billion of its own stock in 2007 and 2008. The bank’s stock price ended 2008 at a split-adjusted $66.91 per share. As of press time, it sold for $24.08. Nothing smart about that buyback.
Also, some companies announce buybacks but don’t complete them. You should make sure that a company has a history of following through on its buybacks. (A company must disclose how many shares that it bought back and the average price of the shares in its annual report.) Typically, of course, you’d want to see that the current stock price is higher than what the company paid for it.
Silverman also suggests that investors examine a company’s annual report to see whether the company has a track record of buying when valuations are low. (Buybacks often go on for years, and that would be reflected in each year’s report.)