You know that
share repurchases can be a great way to return value to stockholders. Yet, when management or a
Board of Directors makes the announcement, that doesn’t mean you should call your broker and pick up shares. Here are three things to watch out for in a
share repurchase plan:
- Make sure the total number of shares outstanding is actually decreasing. In companies with large stock option grants, share repurchases sometimes don’t even cover the dilution caused by printing all those extra stock certificates. Thus, the owner isn’t in any better position as the buy back plan served to line management’s pockets. A good rule of thumb is that when investing in companies with large stock option grants, you should prefer cash dividends because it makes it more difficult for the stock price itself to rise as there is less capital at work in the business.
- Remember that just because share repurchases are announced, that doesn’t mean the company will actually go through with the plan.
- Beware of management that repurchases shares at any price. Buying back stock at inflated values is akin to buying $1 bills for $1.25. It’s destructive to the value of your investment.
