Stock buybacks are back in fashion. That’s because as the economic recovery takes hold and earnings improve across the broader market, U.S. stocks are sitting on a record pile of cash. And repurchases are one way they’re spending it.

Some are sending this back to shareholders via dividends. In fact, a rash of dividend increases the first quarter of 2010 boasted an additional $6.4 billion in payouts. That includes old favorites like Pepsi (PEP) or companies like Starbucks (SBUX), which just declared its first dividend ever.

But the Pepsi dividend and Starbucks dividend are just one side of the coin. Many companies are speeding up buybacks — and after last year saw the lowest proportion of corporate profits spent on repurchases since 2003, it could be a banner year for buybacks in 2010.

Across the S&P 500 index, stock buybacks totaled $137.6 billion last year. But this year U.S. firms have scheduled buybacks or are planning repurchases that will almost double last year’s total — to the tune of $235 billion in 2010, according to Mizuho Financial Group Inc.

Stock Buybacks Can Boost Share Prices

Buybacks are often seen as a bullish sign by investors. In simplest terms, repurchases mean a company thinks its stock is good investment. On a more technical level, buybacks reduce the “float,” or shares that are actually trading actively on the market, so they also naturally firm up stock prices by reducing the supply of free shares on the market for investors.

Stock repurchases have a tangible influence on share prices. Excluding financials in the S&P, stocks that bought their own stock in fiscal 2009 have rallied an average of 7 percentage points more than the index since the start of last year, according to Bloomberg data. That’s not bad, consider the broader S&P index is up a whopping 75% since the March 2009 lows.

Repurchases on the Rise

Cash represents 11.4% of assets at companies outside the financial industry, according to Tokyo-based firm Mizuho. That’s the highest level in more than 50 years. With all that cash on hand, it’s natural to think that an increase in dividends and stock buybacks is in the works.

Some companies that are likely to announce dividend increases include AT&T (T), Merck (MRK) and Altria (MO). There’s a good chance that conglomerate Honeywell (HON) could boost payouts as soon as the end of April after raising guidance recently. The Honeywell dividend is overdue for an increase according to some insiders.

But not all stocks will be using their free cash to pay back shareholders. Many could be planning a repurchase of stock in place of or even in addition to dividends. For instance, Pepsi (PEP) rallied the most in a month after its March 15 stock repurchase that was the largest this year.  Coupled with a Pepsi dividend increase, shareholders have been nicely rewarded in recent weeks.

United Technologies, which ended 2009 with the most cash in at least 22 years, said on March 10 it plans to buy $US4.3 billion in stock. Shares of the Hartford, Connecticut-based maker of Pratt & Whitney jet engines have gained 3.3 per cent since then, compared with a 2.8 percent advance in the S&P 500.

Insider Selling Up Too

There is a catch: Though companies are buying back more of their own stock, the increase in stock repurchases last year wasn’t enough to offset a whole lot of selling from top-tier executives. Insider selling of stock options as a form of executive compensation jumped dramatically as the market surged off the lows. According to the S&P, shares sold among the index’s 500 component companies rose 4.5 per cent in the final three months of 2009 over the third quarter.

Insider selling can be seen as a bearish sign by some traders — after all, if company leaders don’t believe in the stock’s up side, then it’s hard for regular investors to get on board. But the fact is that after watching salaries frozen or cut at the top positions for many companies, executives want to get paid one way or another. Whether Wall Street likes it or not, stock options are simply part of that paycheck to many executives.

Stock Buybacks Mean Companies Not Afraid of Spending Cash

What might get overlooked in all this talk about share prices and stock buybacks is the fact that in general, spending has been the core problem in the recession. Consumers have cut back, businesses aren’t hiring and Uncle Sam is trillions in debt from trying to bridge the gap with taxpayer dollars. So a boost in stock buybacks can be seen as a bullish sign because companies aren’t afraid to spend their cash — even if it’s just to repurchase stock instead of hiring more workers or buying new equipment.

ConocoPhillips (COP), the third-largest US oil producer, said March 24 that it would repurchase $5 billion in shares during the next two years. That’s a lot of cash for a company to burn! Conoco executives wouldn’t have signed off on that deal if they weren’t optimistic about the future of their company, because $5 billion is a big chunk of change when the going gets rough.

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