By Paul R. La Monica

(MONEY Magazine) – Love, but Verify, Those Buybacks

• The Dow may be flat, but corporate America, at least, is bullish on stocks. Or so you'd conclude from the wave of buyback programs announced through late June. Overall, more than 300 companies promised to purchase almost $126 billion of their own stock, according to Thomson Financial. That's well ahead of the volume at this point in each of the past four years.

Buybacks can be good for you. Companies that want their own shares presumably think the stock is a value, and they ought to know. More concretely, a buyback normally reduces the number of shares outstanding. All else equal, that automatically boosts earnings per share.

But don't rush into a stock just because the company says it plans to buy back shares. For one thing, no law says it has to follow through. "A lot of companies announce buybacks, but if they don't execute on it, it means nothing," says Ken Broad, a portfolio manager with Delaware Investments. Even when companies do reacquire a decent chunk of stock, the purchase often merely offsets new shares issued when employees exercise options.

So what you really want to look for aren't buyback promises but actual declining share counts over time. In a recent report, Citigroup Smith Barney U.S. equity strategist Tobias Levkovich cited several blue chips that have reduced shares and rewarded investors over the past few years, including AFLAC (AFL), Anheuser-Busch (BUD) and Kimberly-Clark (KMB). Among smaller stocks, Broad points to three that his firm owns: IHOP (IHP), Intuit (INTU) and Weight Watchers (WTW). --PAUL R. LA MONICA


On paper, companies are betting on their own stock.

NOTE: [1] From Jan. 1 to June 14 each year. SOURCE: Thomson Financial.


Both large and small stocks had a decent three months, but $60 oil kept exuberance in check.

NOTES AND SOURCES: As of June 23. Index returns from Lipper, New York; 877-955-4773. Index levels from Bloomberg. Bond index data from Lehman Brothers. Stock data from Thomson/Baseline. Monthly S&P 500 ratios from Standard & Poor's. Ratios are based on previous four quarters of earnings. [1] Annualized. [2] Price change only. N.A.: Not applicable or not available.