As companies enter a new chapter in the global economic recovery, many are finding that it is time to put the record levels of cash hoarded on their balance sheets during the recession to productive use. For companies bullish on their future performance, one of the more popular methods of reinvesting excess cash is to buy back their own common stock. In fact, over the last few weeks we have seen the highest levels of stock buybacks since 2008.

Most notably, PepsiCo Inc (NYSE: PEP) announced on Monday that it plans to buy back up to US$15 billion worth of its own stock over the next three years. It also said it will boost its annual dividend by seven per cent from US$1.80 to US$1.92. When combined, the two announcements serve as a very bullish signal by PEP and comes hot on the heels of other large buyback announcements, including Target Corp (NYSE: TGT). After seeing a marked improvement in its cash flows, last month TGT resumed its share repurchase programme which it suspended in 2008 to preserve liquidity. Following suit, General Electric Co (NYSE: GE), said yesterday that given its strong cash flow, it may repurchase shares and raise its dividend next year. Philip Morris International Inc (NYSE: PM) and Lowes Cos Inc (NYSE: LOW) also joined the buyback party, announcing share buybacks of US$12 billion and US$5 billion respectively. Just three months into 2010, authorised buybacks stand at US$68.5 billion, already 52 per cent of the US$125 billion authorized for 2009.

Stock buybacks are generally a good thing for shareholders. For starters, share buybacks reduce the number of outstanding shares, thereby increasing Earnings per Share (EPS) figures. Since each share represents a larger claim to the profits of the company, shareholders can now demand a higher price per share. Buybacks also send an optimistic signal to the market as they are often carried out when a company believes its shares are undervalued. This usually increases demand for the stock, putting further upward pressure on the stock price. In the case of PEP, shares rose almost two per cent in pre-market trading on the announcement.

Share repurchase programmes are beneficial to the company as well. Large amounts of cash sitting in money market accounts for extended periods will often weigh down company performance, as year on year return on investments shrink. Buybacks, especially if the company is undervalued, represent a profitable return to investment activities. It is also a more conservative route compared with other investment strategies, such as mergers and acquisitions (M&As), for companies that still maintain some level of risk aversion. Furthermore, buybacks offer an efficient means of passing value to shareholders without increasing dividends. Investors value companies with long periods of sustained dividend increases and are very unforgiving of companies that move to cut its dividends. Therefore, raising dividends to an unsustainable level, and reducing them in subsequent periods is hazardous. Such a move can put a damper on investor confidence, and, ultimately, the company’s stock price. It now becomes clear why PEP’s decision to both buy back shares and increase its dividend speaks volumes about their expectations on future performance.

Still, large corporations aren’t the only ones to benefit from stock buybacks either. The smaller fish in the pond often use buybacks to fend off their larger counterparts. As economic recoveries are usually accompanied by increased M&A activity, companies with large amounts of cash on their balance sheets are usually prime candidates for takeovers. These Companies’ strong cash positions will assist the parent company in financing the acquisition. Firms hoping to resist takeover often buy back their own stock to reduce their cash balances. This also has the effect of increasing their stock price, making any potential takeover more expensive and thus less attractive.

But not all companies believe buybacks are appropriate at this time. Some still prefer more aggressive investment strategies. For instance, Apple Inc (NASDAQ: AAPL) explained that it will not be using its US$40 billion cash balance to repurchase stock, but is instead awaiting opportunities in the M&A arena. On the other hand, some Companies may believe that their stock values are at fair value given the recent rally in equity markets over the past year. In this case a stock buyback would be relatively less appealing.

It will be interesting to watch how this new development in the economic recovery plays out, and how many other companies will take the route of large scale buybacks. However, the recent flurry of buybacks serves as an indication that US economic conditions are in fact improving, and that companies are actively looking for means of putting those huge cash piles to work.

Sean Robinson is an Equity Trader at Stocks & Securities Ltd. You can contact him at srobinson@sslinvest.com.