Is a Stock Buyback a Signal to Buy?

Kiplinger's Personal Finance Magazine, May, 1999 by Kimberly Lankford

When a company buys back its own stock, it's worth a closer look.

Is it a good sign when a company repurchases its own stock? What happens to the share price after such an announcement? --ROBERT SEIGER, Philadelphia

A buyback announcement often precipitates a short-term upward blip in share price--mainly because investors perceive that companies announce buybacks when their stock is cheap. But a buyback announcement doesn't always mean a stock is undervalued. Some companies stockpile shares because they're worried about a takeover or they need more shares for their stock-option plans. Recently, some companies have made buyback announcements so they'll be prepared in case the price drops--not because they think the stock is cheap now. They're not obligated to buy back shares and may never follow through.

Shares of companies with truly undervalued stock that buy back their shares tend to do best long-term. In one study of 1,250 companies, prices for companies that planned buybacks rose an average of three percentage points more than their peers within days of the announcement, and 12 points more over the next four years.

Companies with the highest book-to-market ratios--assets minus liabilities per share compared with price--performed a total of 45 percentage points better than their peers over the four years, says Dave Ikenberry, a finance professor at Rice University and co-author of the study. A buyback can also help because having fewer shares outstanding can boost the stock's earnings per share, a key measure of growth.

David Fried, editor of the Buyback Letter (12 issues for $149; 310-459-9196), picks beaten-down companies that have implemented new strategies and have already started buying back shares, or firms with long buyback records. Fried's portfolio has more than doubled in value since 1996. Among companies Fried likes now are Toys `R' Us (symbol TOY, New York Stock Exchange, recent price $18), OfficeMax (OMX, NYSE, $9), Ryder System (R, NYSE, $27) and SLM Holding Corp., also known as Sallie Mae (SLM, NYSE, $44).

Track medical expenses by PC

Are you aware of any software programs that will track medical expenses? --GEORGE DE PALMA, Wyckoff, N.J.

There are a few, but they're not easy to find. CNET, the online network, lets you download trials of two programs from its Web site. Go to www.cnet.com, click on "down loads," then type the words "medical expense" in the search box.

One program, Medinsure Magic, lets you record medical visits and bills, amounts you've paid and insurance coverage. The program downloads quickly but doesn't go into much detail. Health-Minder, which takes far longer to load, may be more detailed than you need. It was primarily designed to monitor entire health histories, but it also tracks expenses and claims (you have to wade through a lot of extra information first).

Kid-friendly brokers

I'd like to open a small brokerage account for my niece. Which online brokerage firms let you open a custodial account with the least money? --E.S., Salt Lake City

Most brokerage firms require the same minimum initial investment for custodial accounts as they do for adult accounts--often $1,000 to $2,000. A few brokers let you open custodial accounts with as little money as you want: DLJ Direct (888-456-4355; www.dljdirect.com), Quick & Reilly (800-837-7220; www.quickwaynet.com), Suretrade (800-909-6827; www.suretrade.com) and Web Street (800932-8723; www.webstreet.com). Of these, Suretrade offers the lowest commissions--$7.95 for market orders.

It's usually simple to open a custodial account. Just fill out a form from the broker with the minor's name and social security number and the name of the custodian--the adult who makes the trades.

Sports cards that make the grade

In the January Q&A you said that professional grading can make a baseball card more valuable. What is professional grading and how much value can it add? --SCOTT LENGYEL, Houston

Professional grading--in which an expert grades the card's condition, usually on a scale of 1 to 10--can add tremendous value to a sports card. For example, a 1984 Dan Marino Topps rookie football card recently sold at auction for $4,000, primarily because it received a perfect score from a professional grading firm. If it wasn't graded, the card would be worth only about $150, says Bob Lemke, senior price-guide analyst for Krause Publications, which publishes magazines and books for collectors.

Professional grading also makes it easier to sell cards sight unseen, such as through Internet auctions. The standards are so high that minute printing defects--such as tiny specks, staining and slight shifts off center--can ruin a card's perfect score, even if it's never been touched.

Professional Sports Authenticator is the largest grading firm. The experts (often former card dealers) give the card a score and enclose it in a plastic case. You can either have a PSA-authorized dealer send the card out for grading or join the PSA collectors club (800-325-1121; www.psacard.com).