By: Matt Krantz

February 16, 2004, USA Today

Flush with cash from two blowout quarters of earnings, companies are buying back their stock at a feverish pace.

Companies ranging from brokerage Merrill Lynch to furniture maker Herman Miller and insurer Aflac are seeing improved financial performance as a chance to make investors' holdings more valuable by reducing the number of shares outstanding.

While there are many fans of buybacks, critics warn they might not be as lucrative as some think.

In January, companies said they would spend $ 24.9 billion buying back stock, a 20% jump from the amount announced in January 2003, researcher TrimTabs says. Last year, companies announced $ 152 billion in buybacks, an increase of about 2% -- a sign of a comeback following a 37% drop in 2002.

Proponents of buybacks say they benefit investors because share prices typically rise after a buyback is announced.

They also reflect a company's confidence in the future performance of its business and the overall economy, says David Ikenberry, professor of finance at the University of Illinois.

Even so, some point out investors should be careful before getting too giddy over the rash of buybacks. That's because companies:

* Often do not follow through. Just because a company says it will buy back shares doesn't mean it has to. In fact, 30% of the firms that authorize buybacks never do, says Edward Zajac, professor at Northwestern University.

* May merely be soaking up stock options. Howard Silverblatt at Standard & Poor's says shareholders will see little real benefit from buybacks because they're merely offsetting shares issued as employee stock options.

For instance, Merrill Lynch plans to buy up to $ 2 billion of its own stock, which is equivalent to 33 million shares. But that doesn't cover the 37.5 million shares of employee stock options that Merrill had outstanding in September, which diluted earnings.

Companies are "buying back (shares) with one hand and issuing new ones with the other," Silverblatt says.

* Are distracting investors from dividends. By promising a buyback, companies can appease investors and avoid pressure to increase a dividend. New tax laws have made dividends more popular with investors. But companies still prefer buybacks because they are not required to follow through.

Silverblatt says dividends paid out by S&P 500 firms increased 15.9% in January, well below the growth in buybacks.

* Inflate profitability. Since buybacks reduce the number of shares outstanding, a company can use them to give their per-share earnings a boost when needed, says J. Fred Weston, professor of finance at the University of California, Los Angeles. That makes the business look better, when nothing fundamentally has changed.

So he advises skepticism. Buybacks are "widely practiced," he says, but often do not "make economic sense."