The Upside of Stock Buybacks

S&P finds 16 high-ranked companies with good earnings' track records that have lately reduced their shares outstanding

By Numer de Guia

When a company decides to repurchase its stock, it may mean two things. One, it could signify that the outfit has poor business prospects, and the best use of its excess cash is to liquidate some equity. No. 2 is the more positive possibility: It may arise from management's assessment that the stock price is cheap relative to the value of the business -- and that it's worthwhile to buy back some of the shares.

Of course, investors would like to know if the latter reason is behind a buyback decision. That's the idea behind this week's screen. We started with the list of companies ranked 4 STARS (accumulate) or 5 STARS (buy) by Standard & Poor's equity analysts, meaning the stocks are expected to outperform the overall market over the next 6 to 12 months. Thus, based on S&P's fundamental analysis, the stocks are attractively valued.

To further strengthen our case, we then looked for companies with favorable track records: those that have posted 25% growth in operating earnings (on a 12-month trailing basis) over the past three years. Then, we screened for the buyback angle, searching for companies that have reduced their shares outstanding by at least 1% in the past 12 months.

These 16 stocks emerged:

• Apollo Group (APOL )

• Boeing (BA )

• Coventry Health Care (CVH )

• ExxonMobil (XOM )

• Federated Investors (FII )

• HCA (HCA )

• IndyMac Bancorp (NDE )

• Mentor (MNTR )

• Mid-Atlantic Medical (MME )

• Nabors Industries (NBR )

• Oracle (ORCL )

• Scientific-Atlanta (SFA )

• SCP Pool (POOL )

• Shaw Group (SGR )

• Sysco (SYY )

• UnitedHealth (UNH )

De Guia is a portfolio services analyst for Standard & Poor's

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