There are two common ways that companies can return money to shareholders: dividends and stock buybacks. I love dividends, it puts cash in my account and is usually indicates that the company is doing well enough to pay the owners. Generally speaking, I like buybacks less. They spend company money to buy shares and take them off the market. With fewer shares, the same (or hopefully, growing!) company earnings are larger on a per-share basis, ideally, increasing the value of each share. Also, if a company buys stock opportunistically (especially when the shares are below book value or otherwise quite cheap) they can add value the same way anyone else adds value to their company: by buying something that is worth more than the cash it cost to buy it.
Overall, for larger companies especially, a reasonable buyback program can add value to current shareholders by giving them a bigger slice of the market cap pie. Two well run large companies have been buying back shares in notable fashion lately.
Firstly, Amgen, a large biotech company recently bought back nearly 10% of ALL of their shares! They spent about $5 Billion of their considerable pile of cash ($17.6B at last quarter) and cash flow (another $5B for the past twelve months) (source: Morningstar). They made an offer to shareholders to directly purchase their shares for $60 each when the stock was trading around $57. Remaining shareholders now have the same great company, split between 10% fewer shareholders. This has turned out to be a great short term buy, as the stock now trades above $63.
One of my favorite companies, Norfolk Southern (yes, partly my favorite because it it a railroad), has been buying shares opportunistically this year. They have an ongoing program, and can purchase shares whenever they like. In the first half of this year, they purchased 11.6 million shares at an average price of $68.28 per share. When the bottom fell out in August, they ramped up their purchases, confident in their future. They bought another 12.2 million shares at an average price of $66.23 per share. They now trade in between $70 and $75.
If you trust the management, and they are buying, you may want to think about buying also.
Disclosure: I own NSC and AMGN directly and in accounts I manage.
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