As proponents of value and long term investing, we give special importance to fundamentals and management efficiency and quality. Now there are certain ratios such as steady dividends, returns on equity and returns on invested capital that help us assess the companies on these parameters. However, there are certain factors that seem to have undue influence over investors as far as the management's image is concerned - share buybacks being one of the the most notable of them.
The usual market sentiments associated with share buyback are positive. And in some cases it could be one of the best ways to reward the shareholders. Investors often associate buybacks with the view that the management is confident about the business and the value in the stock. And at times, they even buy the shares just to participate in the buyback offer.
The case for a buyback can hold merit when there are no better ways to invest the company's cash at a rate that is higher than the cost of capital. Further, a share buyback only makes sense if it is carried out when the stock price is lower than the intrinsic value.
However, there have been cases when the managements have announced buybacks just to support the share prices and cash in on the positive sentiments associated with the buybacks. That share buyback announcements are hardly an indication of management quality and fundamentals is a point well reflected by stocks like Cairn Energy and Jindal Steel and Power - that have only eroded shareholders' wealth since such announcements. And that too when the general market sentiments have been bullish. Hence, investors should not give buyback announcements undue importance and should remain objective while taking investing decisions.