Stock buybacks

There is an interesting article at Investor's Business Daily about the amount of stock buyback programs announced year to date. The article states that more buyback programs are resulting in fewer shares outstanding as opposed to simply netting out the added shares of option programs:

"Earnings this quarter came in above expectations. The sheer scope of cash in the corporate coffers is quite impressive," said Richard Peterson, market strategist for Thomson Financial.

By buying back shares, companies give an instant boost to their earnings per share, since there are fewer shares outstanding.

Also, by diminishing the supply of shares, they can raise the price if demand remains the same.

In actual practice, most buybacks are used to offset stock option grants to employees or dilution from acquisitions. So they don't truly reduce share counts.

But that's changing, said Howard Silverblatt, equity analyst with Standard & Poor's.

In the first quarter, 34% of buybacks were used to reduce shares, he said. That's way up from the fourth quarter's 22%, which is the long-term average.

I had a post a bit ago about Autozone and its buyback program and how it has affected the company's reported EPS. Companies are paying a high price to boost EPS. This was also crux of the issue with Altera and its treatment of Wells Fargo analyst Ted LaFountain (for a recap click here).