When a company's balance sheet has way more cash than it needs for basic operational requirements, the company might start looking around for good investment opportunities.
While this usually results in the company making an acquisition, sometimes the best investment a company can make is to buy back its own stock. When this happens, investors should pay close attention. (To learn more, read A Breakdown Of Stock Buybacks.)
Why Are Buybacks So Special?
Right off the bat, an active share repurchase program points to how the company's management and board of directors view the company's future. Why else would a company spend millions, or even billions, of dollars repurchasing its own equity in the open market unless it thought doing so was a wise investment or that its shares were being undervalued?
Since they are privy to information that may not have been disclosed publicly, a decision by senior management to buy back its own shares provides the investment community with a major signal concerning the company's future prospects. Simply put, it is management putting their money where their mouth is.
While there is no guarantee that when a company repurchases its stock that the value of its shares will increase, when the circumstances are right, mimicking a company that has repurchased its shares can prove to be an extremely profitable venture.
All Aboard the Buyback Express
Here's a short list of companies that have recently issued share repurchase programs or expanded their existing programs.
|Company||Date Program Announced||Maximum Amount Allowed|
|Deckers Outdoor (Nasdaq:DECK)||June 8, 2009||$50 million|
|Peerless Systems (Nasdaq:PRLS)||June 8, 2009||2 million shares|
|Walmart (NYSE:WMT)||June 5, 2009||$15 billion|
|Perficient Inc. (Nasdaq:PRFT)||June 4, 2009||$10 million|
|Supervalu (NYSE:SVU)||May 28, 2009||$70 million|
|Data as of market close June 10, 2009.|
With over $230 million in cash on hand as of March 31, Deckers has more than ample cash to fund its just-announced $50 million share repurchase program. The move appears to be an attempt by management to reassure investors that the company's outlook remains strong despite earlier analyst comments that questioned the company's ability to continue growing its popular Ugg footwear brand, as the market for that product appeared to have reached the saturation point. The Ugg brand accounts for 84% of the company's sales.
The massive $15 billion buyback by retailing giant Wal-Mart is also intended to send a positive signal to markets. The company believes that it will hold on to the recent sales gains, which resulted from the down-shifting of higher-income shoppers due to the recession. The company expects to be the primary beneficiary of this fundamental shift in consumer attitudes and behaviors.
The Bottom Line
The stock market is full of examples where companies have bought up boat loads of their own stock, and then watched the share price rise steadily in the years to come. So, when you see a company that is buying its own stock, it is usually a good idea to do a little research to see if the stock is truly undervalued.
What do you think of these companies? Should investors be following suit? Join the FREE Investopedia Stock Simulator to share your thoughts and see what other investors are saying.
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