“European companies increasingly are buying their shares back, pumping up stock prices and winning over investors for their conservative use of cash in a lackluster market,” writes Sara Calian in today’s Wall Street Journal.

“In Europe, share buybacks, which were unpopular and not permitted under national regulations in some countries six years ago, have increased in recent months. European corporations have increased their cash flow in the past several years, helping fuel the buyback trend. There also is a change in perception. Years ago, a buyback was seen by many investors as a sign that the company didn’t have an acquisition strategy.”

” ‘Right now, the market would rather see companies use cash for buybacks than put the cash in an investment that may or may not return something to you,’ says Teun Draaisma, a market strategist at Morgan Stanley in London. ‘In the late 1990s, investors took buybacks as a sign of defeat. The thinking was, “If you need to buy back shares, you don’t have anything else to do with the money and it must be bad news.” But now share buybacks are seen as a healthy sign.’ “

“Indeed, Martin White, a Barclays Global Investors active equity strategist in London, says his firm includes share buybacks in its criteria of stock selection, and when the number of buybacks increases, it is sometimes used as a buy signal for fund managers. ‘A company buying its own shares can be a positive sign that management regards their stock price as representing good value,’ he says. ‘It can also indicate an economy and discipline about how corporate cash flows should be spent.’ “

“Stock repurchases are more common in the U.S., where for many years they served as tax-efficient alternatives for corporations to paying higher dividends, Mr. White says.”

“The U.S. buyback yield — the dollar amount of announced buybacks divided by companies’ market capitalizations — has increased in recent months, rising to 2.3% for annualized 2004 data as of Aug. 16, which is a jump from 1.8% in 2003, according to Morgan Stanley. The yield has been above 1% for the past decade.”

“The European buyback yield, using the same dollar calculations as the U.S., has more than doubled to 1.3% for 2004 as of annualized data for Aug. 16, compared with 0.6% in 2002, according to research by Morgan Stanley. On average, if an investor buys a European stock on the day it announces a buyback, there is a 67% probability of outperforming the market 12 months after the announcement and a 64% probability of outperforming the sector in 12 months, according to the study.”

http://online.wsj.com/article/0,,SB109320850054097846,00.html