Buybacks set a record, boost stock prices

Publicly traded companies have been buying back their shares at an unprecedented rate, hoping to bolster their stock prices.

Stock buybacks hit a high in the second quarter -- $157.8 billion by companies in Standard & Poor's 500 Index, S&P reported Thursday. It was the seventh consecutive quarter in which buybacks exceeded $100 billion.

The recent turmoil in the stock and credit markets could dampen enthusiasm for future buybacks. But the spigot isn't being shut off. On Thursday, Charlotte-based steel maker Nucor said it would buy back as much as $1.66 billion worth of stock.

It's a gambit that usually works, at least in the short-term. "The quickest way to see your stock go up is fire a lot of people or do a buyback," said Howard Silverblatt, senior analyst at Standard & Poor's.

Most stock experts give buybacks a big thumbs-up, but it's not unconditional love. Some would rather see companies funnel excess cash to their shareholders by issuing dividends. Nor do they want to see companies cutting back on product development or acquisitions to have the money to buy back shares.

Years of fat profits -- companies in the S&P 500 have had 18 consecutive quarters of double-digit earnings growth -- have left corporations flush with more cash than they can reasonably reinvest in their businesses. Using some of that money -- or even borrowing more, as some companies have -- to buy back their own stock demonstrates management's confidence in the future.

It provides a tangible benefit, too.

"Profits are spread over fewer shares and, therefore, it increases earnings per share," said David Fried, editor of buybackletter.com, an investor newsletter that focuses on companies that repurchase their stock. Earnings per share is a key measurement analysts use to determine the intrinsic value of a stock.

In May, IBM said its stock buyback program would boost earnings per share by 14 cents to 17 cents. IBM purchased $15.7 billion of its stock in the second quarter -- a quarterly high for an individual company, Silverblatt said.

But that doesn't mean you should go out and buy shares in a company just because it announces a buyback, said Hal Eddins, vice president and investment adviser at Capital Investment in Raleigh.

"It's like a cherry on top of the ice cream sundae," Eddins said. "It's nice to have, but it's not the only thing."

In August, three companies based in the Triangle, or with significant operations here, joined the parade of companies spending big bucks to buy their own shares. A few details:

* Martin Marietta Materials said Aug. 15 that it would buy back as many as 5 million shares of stock, which would cost about $600 million at the then-prevailing price. In the first half of the year, the Raleigh producer of construction materials bought nearly $500 million of its stock.

* Network Appliance, which helps companies manage digital data, announced plans to buy up to $1 billion worth of stock. The California company has more than 600 workers in the Triangle and this year was promised nearly $16.3 million in government incentives for a major expansion.

* Tekelec of Morrisville, which makes telecommunications software, said it would buy back as much as $50 million of stock.

Silverblatt said stock buybacks boost share prices while the companies are buying them, a process that can stretch out for long periods of time.

"The stock can still go down, but it will go down less because it's being supported" by the company's share purchases, he said.

But Silverblatt hasn't seen any evidence that stock buybacks can buoy a company's stock price over the long haul -- even after the company has stopped buying its stock.