Companies can build shareholder value by repurchasing stock

The Leckey File

Your Money

September 11, 2005|By Andrew Leckey

Q. Why do companies buy back their own stock, and does it help me as an investor? They present it as a good thing.

K.C., via the Internet

A. Companies holding a lot of extra cash are aggressively purchasing their own shares this year.

Historically, 20 percent of the companies in the Standard & Poor's 500 reduce their share number through buybacks each year. This rose to 33 percent in the first quarter of this year and 50 percent in the second quarter, according to Standard & Poor's Corp.

Firms say they repurchase because they consider their shares to be undervalued. Buybacks also give each remaining share a greater percentage of corporate ownership.

In addition, a significant number of repurchased shares often go to employees who are exercising their stock options.

"Companies are being pushed by individual and institutional investors to return value to shareholders through either dividends or buybacks," said Howard Silverblatt, market equity analyst with Standard & Poor's in New York. "Buying back shares also helps earnings per share."

Andrew Leckey is a Tribune Media Services columnist. E-mail him at yourmoney@tribune.com.

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