Magazine article Black Enterprise

Hitching a Ride

Magazine article Black Enterprise

Hitching a Ride

Article excerpt

Share buybacks signal confidence in a company's future

When companies announce they will repurchase their own shares, it's the corporate world's version of paying yourself first. Investors usually consider share buyback programs, as they are also known, as a buy signal for the stock.

Market experts note that companies executing buybacks tend to be financially strong, which in turn leads to superior performance. The programs can reduce the number of outstanding shares, and sometimes boost earnings per share.

Other legitimate reasons for buyback programs include: offsetting shares issued to employees who exercise stock options, preventing further dilution of ownership; reducing the amount required for ongoing dividend payments, providing more flexibility for future use of cash flow; and increasing tax efficiency for shareholders as an alternative to paying dividends.

But the catch with many buyback programs is that they are announced but not implemented right away, making it difficult for mom-and-pop investors to cash in. One way to profit from repurchase programs is to buy a basket of stocks from companies that have historically bought back their shares.

"Working with Standard & Poor's, we've developed key criteria for buyback companies? says Robert K. Burke, vice president and manager, defined portfolio marketing, at John Nuveen & Co., Chicago. "First, we narrow the field to companies with $500 million or more in market capitalization, eliminating very small companies. Then we screen for quality: companies must have an S&P senior debt rating of AA- or better as well as an S&P quality ranking of A or A+, which shows a strong history of earnings and dividends growth and stability. …

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