Berkshire Hathaway Inc. (BRK.A), Bank of America Corp (BAC): Clearing the Hurdle, Will Share Buybacks Boost or Crush Your Returns?

While the market’s reaction to share buybacks is usually positive (because if share count is reduced, earnings per share will increase in theory), investors need to remember that no stock deserves to trade at 1.0 times its book value or 16 times trailing earnings. The stock market is an auction market – there are not mandated prices that determine when a stock is a good buy or when a company should repurchase its own stock.

If a company that you hold stock in announces a buyback program, ask yourself, “Is this the best use of capital?” or “Is this a signal that management believes its stock is undervalued or that it can’t find additional investment opportunities?”

The article Clearing the Hurdle: Will Share Buybacks Boost or Crush Your Returns? originally appeared on Fool.com and is written by David Hanson.

David Hanson has no position in any stocks mentioned. You can follow David on Twitter. The Motley Fool recommends Bank of America and Berkshire Hathaway. The Motley Fool owns shares of Bank of America and Berkshire Hathaway.

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