Spotting Companies With Buyable Buybacks

“When is a buyback more important than a dividend?” Cramer asked Friday. “When the company doing the buying actually means it!”

And by “means it,” he means they’re intent on repurchasing so many shares that it will move the share price.

See, a lot of buybacks don’t matter much. Companies initiate them but rarely at such a size that they clear a big enough chunk of stock from the market to make it worth your while. This is why Cramer prefers it when companies use their cash to issue a dividend. In the end, it’s better for the shareholders.

But there are occasions when management deems its stock so cheap, so undervalued that it spends huge sums of money to boost the price. Yes, they are rare, but they do happen. You just need to know how to spot them.

A perfect example is the buyback announced by Cypress Semiconductor on Oct. 21, following a strong quarter. Cypress said it would repurchase $600 million worth of shares—or about a third of the company’s market cap. You can’t doubt that level of commitment on the part of CEO T.J. Rodgers.

The result? CY has since jumped 38 percent to $17.62 from $12.84.

Cramer said he knows the buyback was the main driver behind that increase because none of Cypress’ fundamentals changed in the meantime. The only catalyst here was the $600 million Rodgers put to work.

Texas Instruments did much the same thing when on Sept. 16 it added another $7.5 billion to the $1.3 billion it had left in its old repurchase authorization. That $8.8 million was equivalent to about 28 percent of the company’s market cap, which again is a sizable piece of TXN.

This buyback proved so strong that the share price is up 33 percent to $24.67 from $32.82 even though Texas Instruments talk of weaker consumer demand and a forecast for sequentially lower revenue during the Oct. 25 earnings report. Cramer thinks TXN is a buy for the buyback alone, though investors may want to wait until the mid-quarter update on Tuesday, Dec. 7 before jumping in.

So if these two are good buybacks, what’s a bad one look like? How about the one Cisco Systems added to on Nov. 18 with an additional $10 billion, which it added to the $4.5 billion already authorized. That may be bigger in number than Cypress or Texas Instruments, but it’s still worth only 14 percent of Cisco’s market cap.

Not to mention, Cisco has a habit of issuing lots of stock, whether for insiders or acquisitions, even while it’s in the middle of a repurchase plan. Consider, for instance, the fact that between July 30, 2007, and the end of October 2010, the company bought back 1.07 billion shares while shelling out 474 million new shares. The net was only about 600 million shares when all was said and done. And over the same period, CSCO has dropped 22.5 percent, further proving that the buyback has had no positive effect.

So to sum up: Look for buybacks that are big relative to the size of the company, and keep an eye out for companies that are aggressively buying their own shares. That could be your chance to ride the price back up—just as you could have in Cypress Semi and Texas Instruments.

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