As I am the buybackking I am going to tell you all I know about buybacks.  I have been getting crushed and to top it off one of my buyback stocks filed chapter 11 - Circuit City (CC).  I am still a little upset because I do not believe CC needed to go broke, if management decided to make changes before bankruptcy rather than after it.  Once your company hits chapter 11 it usually is not good for stockholders.  In the end, after they emerge they usually cancel the stock and give stockholders the chance to buy warrants way out of the money.

From 2000 to 2008 the stock never changed much.  Long-term debt was low and current asset to current liabilities was a ratio of 2:1.  Even today that ratio is like 1.5:1 (CC SEC filing).  Even in their latest quarterly, their balance sheet looks no different or better than 100s of other companies.  Revenues are down but only like 10% and they have been closing stores and terminating higher cost employees.  So I thought they could pull through.  They still have $1 billion in equity.

The reason I am the buybackking, is they have been buying back shares since 2003 lowering shares outstanding from 210 to 170 million shares in 2007.  Thus I was attracted to it with its buybacks and little long-term debt.  From what I learned it is not long-term debt that is too important it is short-term liabilities - rent, debt, etc. that determines whether a company can pay its bills.  The best ratio to look at is the current ratio.  A current ratio above 3 as generally considered safe.

As result of this and observing 100s of buyback stocks.  I think there are two reason for buybacks.  1. is to increase shareholder value, and 2. the sinister to unload stocks when insiders know the stocks is troubled and they want to get money out in privately negotiated buybacks.  The problem with #2 is the same problem you find in horse racing the owners and trainers know what is really going on with the stock or horse.  The public is left guessing.

The reason I like buybacks is imho they are better than dividends.  Suppose you have 2 companies p/e of 10, price of 20, and 10% growth rate.   The company wants to distribute 50% of earnings to the stock holders permanently.  If the company issues a 5% dividend, the stock price will probably jump to 30 or more and thus offer a 3.3% yield.  However, if the stock chooses to distribute 50% as dividends and 50% as buybacks.  The stock probably won't rise and have a 2.5% yield.  Dividend hunters will probably consider the $30 a better buy.  However, as the $20 stock buys back its shares, not only can it increase its dividend 10% a year, it can increase it 15%.  Furthermore the stocks fundamentals are based on old shares outstanding creating more hidden value.  If the stock becomes to attractive it might be a buyout candidate and I suggest many CEOs to increase their dividend if the price becomes too attractive.

Most companies do not buy back shares correctly.  They start a plan and buyback too aggressively.  I think they would be wise to keep it in short-term investments and buy from the pool at a more steady rate.  Furthermore if they really need the money they can use money from this pool.  If many companies like CC did this they might still exist and could be buying back at the low prices of today.   Today many companies might slow their buyback plans and focus on survival.

Some other info about buybacks.  Buyback announcements and buyback rates are not the same.  Consider only a company that is losing shares outstanding as a buyback stock.  Many companies have buyback plans but shares outstanding continue to rise.  This can be from stock options, to recent acquisitions,  to other sinister things.