Over the past year, PepsiCo (PEP) has been making the right moves. Perhaps one of the biggest was to buy up its key bottlers in the U.S. so as to improve cost efficiencies, as well as to broaden the product mix. In fact, Coca-Cola (KO) also realized the logic of this strategy and is doing the same thing.

And keeping up the momentum, PepsiCo did something else to make shareholders happy. Monday, the company announced it has approved a 7% increase in its dividend and there a whopping $15 billion authorization to repurchase up to $15 billion in shares of the company.

The Wall Street Journal's 'Heard on the Street' column reports (subscription required) on the less than impressive results of recent stock buybacks at public companies.

When a company buys back its stock, it pays cash to shareholders for their shares, and the retires them -- in a market where the vast majority of stocks are trading well of the highs the market reached last year, many recent buybacks are looking poorly-timed. The Journal writes that "General Electric (NYSE: GE) bought back $29 billion dollars of stock, paying an average of $36 and change for each share, according to regulatory filings. This week, it sold $12.2 billion worth for $22.25 each (before fees) and put $3 billion worth of warrants, with the same strike price, in Mr. Buffett's pocket."

The column goes on to argue that dividends "make for better financial discipline and more transparency." Of course that's easy to say right after the market has tanked, but it's a pretty illogical conclusion.

The main argument against dividends is that they're incredibly inefficient, adding an extra 15% cost. A company that pays out a large portion of its income as a dividend is effectively lowering its margins by 15% -- a move that seriously hampers long-term value.

Of course it's unfortunate that GE bought back so much stock only to sell it again at a lower price, but it's a mistake to form general theories about corporate governance based on anecdotal evidence culled from a once-in-a-generation credit meltdown. Given that shareholders of publicly companies presumably feel that their stocks represent a good value, it makes much more sense for corporate brass to hand them more stock with buybacks instead of cash to pay an extra tax on.

Nvidia (NASDAQ: NVDA) turned in putrid earnings. It also announced that it would buy back a ton of its own shares.

The graphics chip company took a charge of nearly $200 million in its last quarter for product problems. Nvidia also admitted it did not see strong competition coming from rival AMD (NYSE: AMD). Nvidia lost $120 million in the quarter and revenue dropped slightly. Under most circumstances, especially in a weak market, the company's shares would be punished.

But according to The Wall Street Journal, "On a positive note, Nvidia announced a $1 billion increase to its stock-buyback program." For a company with a market cap of only $6 billion that is a big deal.

Share buybacks often do not do much for a company's stock price, but in a market where earnings are having a rough time in most sectors, the idea that EPS can be pushed up by a falling number of shares in the float could become more attractive. It is a form of "reverse dilution," which could find a new place in a bear market.

Nvidia share shares rose 10% after hours [shares are rising 6% in premarket as of 8:10 a.m.]. It may be a signal to management at other companies that buybacks are a sign that a firm thinks its shares are undervalued. The market cares more about that than it used to.

Douglas A. McIntyre is an editor at 247wallst.com.

The Wall Street Journal reports (subscription required) that 2007 was a record year for share buybacks, especially among financial companies. With the market down, a lot of those repurchases aren't looking so smart. The Journal adds that "the buyback boom looks to be in its final innings. In the fourth quarter last year, buybacks fell 18% from the previous quarter, the biggest quarter-to-quarter drop in more than five years."

Making it worse, many of those companies that bought back stock aggressively are now issuing more stock to shore up their balance sheets, and those offerings are being priced at beaten-down valuations. Companies have essentially bought back stock at $100, then sold it at $50, and paid a bunch of fees in the process. Not a good business model.

But let's not throw the baby out with the bath water. Because of the unfavorable tax treatment of dividends, I would argue that share buybacks are the best way for companies to invest excess cash when opportunities to achieve high returns reinvesting in the business are not available. If you're long a stock, presumably you think it's undervalued -- so why would you want to have the company send you cash to pay taxes on, rather than giving you a larger chunk of the business?

The problem is that many buybacks seem to have been done for the purpose of propping up the share price while insiders dumped. But that's a separate issue.

Writing about Apple's (NASDAQ: AAPL) decision not to buy back stock or pay a dividend, BloggingStocks' Dough McIntyre had this to say: "Apple could have announced a share buyback or created a dividend. Some critics would say that a "growth stock" is not an investment for yield investors. But, for the time being Apple is not a growth stock. Giving loyal investors a little cash back would not have been such a bad idea."

Here's why I disagree: at 27 times earnings, Apple will have to sink or swim as a growth stock. Apple boasts a return on equity of close to 30%. If the company's effectiveness is poised for such a substantial drop that shareholders are better off paying tax on a dividend that can be invested in savings accounts paying under 4%, then Apple investors might want to head for the hills.

I know, Apple has a $20 billion pile of cash. But if the company doesn't have better opportunities for that cash than dividends, shareholders are in big trouble.

They might be in big trouble anyway. But a dividend, even though it might have pleased some short-term investors, would have been confirmation that the company's ability to earn extraordinary returns on capital is a thing of the past.

At Apple Inc.'s (NASDAQ: AAPL) annual meeting, the company had an opportunity to calm upset investors. With its stock down from $202 to $124 in just a little over two months, throwing shareholders a bone might have been a good idea.

Apple currently has $20 billion in cash and short-term investments. The company almost never buys other companies. It does not need the money for capital expenditures. Each quarter, the cash balance gets larger.

Apple's faithful are concerned, with good reason, that iPod sales may be slowing. There has been doubt voiced about whether the company can hit its ambitious iPhone sales targets. The economy could also catch up with Apple. PCs and consumer electronics are not essentials when money gets tight.

Apple could have announced a share buy-back or created a dividend. Some critics would say that a "growth stock" is not an investment for yield investors. But for the time being Apple is not a growth stock. Giving loyal investors a little cash back would not have been such a bad idea.

Steve Jobs probably thinks he knows what is right for people who own stock in his company. Some investors are probably losing patience with that. Not everyone is a billionaire.

Douglas A. McIntyre is an editor at 247wallst.com.

I've written about share buybacks a fair amount in the past: whether insiders were using them to prop up share prices while they dumped, what role they have played in sustaining past bull markets, and whether they create long-term value for shareholders.

In Sunday's New York Times, Mark Hulbert wonders whether they're still good for investors. According to Hulbert:

S&P focused on those companies within the S&P 500 index that repurchased shares between the beginning of 2006 and June 30, 2007 - a total of 423 companies. It found that, as of Sept. 30 this year, 320 of them - or 76 percent - would have been better off had they not repurchased their shares and instead invested in an index fund benchmarked to the S&P 500.

There are a number of possible reasons for this: companies may be buying back their own plummeting stock in desperation as insider options fall farther and farther out of the money. For instance, Countrywide Financial (NYSE: CFC) actively repurchased stock, even as its CEO dumped huge numbers of shares and the company's prospects weakened.

MAJOR PAPERS:

• According to the Wall Street Journal's "Heard on the Street," as the economy continues to slow and the credit markets face further turmoil, high-profile companies like Countrywide Financial Corporation (NYSE: CFC) and The Home Depot Inc (NYSE: HD) are cutting back on buybacks as their shares drop.
• The New York Times reported that BlackRock Inc (NYSE: BLK) is expected to be the main asset manager for a $75B fund being created by Bank of America Corporation (NYSE: BAC), Citigroup Incorporated (NYSE: C), and JP Morgan Chase & Co (NYSE: JPM) to help stabilize the market fJor asset-backed securities, according to a source. The Bank of New York Mellon Corporation (NYSE: BK) is reportedly a leading contender to be a custodian of the fund.

OTHER PAPERS:

• A ruling in Vodafone Group Plc's (NYSE: VOD) favor may cause Apple Inc (NASDAQ: AAPL) to rethink its business model for the iPhone device. The injunction against Deutsche Telekom AG (NYSE: DT)'s T-Mobile unit may force Apple to "unlock" its iPhones, the UK Times reported.
• Struggling airline UAL Corporation (NASDAQ: UAUA), along with its unit United Airlines, is struggling, but finding a carrier willing to merge may be a problem, BusinessWeek speculated.

Standard & Poor's has studied the impact of stock buybacks and reached some pretty disconcerting findings. As stock buybacks have soared in popularity and become a favorite demand of activist investors, S&P found that they might not be so great after all.

As the company put it: "Conventional wisdom holds that (1) stock prices go up as a result of buybacks, (2) more buybacks are better than fewer buybacks, and (3) announced share buybacks actually reduce the number of outstanding shares significantly.

"Based on a study of buybacks conducted by S&P's Equity Research Services of the 18 months ended June 30, 2007, we believe that all three points were unsupported by the data during that period."

This may be true, but I'm still a fan of buybacks. When no compelling internal growth opportunities can be found, buying back stock is a lot better from a tax perspective than returning cash to shareholders the traditional way: dividends. Changes in the tax code could very well make buybacks obsolete.

One of the reasons for the declining performance of buybacks could be the motivation behind them. If they are done because the stock is undervalued and the company wants to return money to shareholders, that's great. But here's what Warren Buffett had to say about buybacks:

Dell (NASDAQ: DELL) has filed all of its past due quarterly financial statements with the SEC. That means that the Nasdaq no longer has a reason to delist that company. It also means that the PC company can begin its huge share buyback program again.

Dell sent in the filings after an investigation "found that senior executives and other employees manipulated the company's financial statements to give the appearance of hitting quarterly performance goals," according to The Wall Street Journal [subscription required]. The adjustment to net income for the four years was a modest $92 million.

In 2005, Dell's board had set up a plan to buy back as much as $10 billion worth of shares. But the investigation of accounting problems covered fiscal years 2003 through 2006, and the program was suspended.

With a market cap of $66 billion, buying $10 billion in shares could give earnings per share a very big lift.

Douglas A. McIntyre is an editor at 247wallst.com.

According to The Financial Times, September is looking to be the weakest month for announcing share buybacks in four years. The credit crunch and concerns about future liquidity are apparently leading many companies to focus on shoring up their balance sheets, rather than returning cash to shareholders through buybacks. The popular process of borrowing large amounts of money to buyback shares also appears to be fading as borrowing costs rise.

This could spell trouble for the markets: Thomson Financial estimated that more than 20% of earnings growth for S&P 500 companies would be a result of buybacks. If the buybacks grind to a halt, will earnings suffer? It seems likely.

But think about that 20% figure. If it's accurate, that means that more than a fifth of corporate earnings growth is smoke and mirrors -- phantom earnings growth created by financial engineering rather than business. And it's unsustainable: Many of the massive share buybacks that have been announced are too large to be covered by the companies' free cash flow: They require a dip into shareholder's equity, and are a one-shot deal.

If corporate earnings growth is being driven by buybacks, we need to be scared. It means our economy is actually doing a lot worse than it looks.

A piece on FinancialWeek.com looks at an interesting conflict of interest: Companies buying back their own stock while insiders dump their own shares. It looks really bad:

...according to a Financial Week analysis of the 50 largest buybacks, at several of these companies, chief executives sold sizable chunks of stock while the buybacks were ongoing. What's more, the size of those sales exceeded, and in most cases dwarfed, their stock sales in the 12 months before the buybacks were announced.

Because share buybacks prop up the price of a stock, the effect is that these executives may be using shareholders' money to increase the price they can get for their own shares, as they dump them into the buyback. In addition, the analysis found that companies where insiders receive bonuses related to earnings per share targets are more likely to engage in aggressive buybacks. reducing the number of shares increases EPS.

Here's what Warren Buffett once wrote about buybacks:

"Now, repurchases are all the rage, but are all too often made for an unstated and, in our view, ignoble reason, to pump up or support the stock price. The shareholder who chooses to sell today, of course, is benefited by any buyer, whatever his origin or motives. But the continuing shareholder is penalized by repurchases above intrinsic value. Buying dollar bills for $1.10 is not good business for those who stick around."

This all looks very fishy, and could, and probably should, emerge as the next major corporate governance scandal.

Shares of Expedia (NASDAQ: EXPE) continued their descent today after the company announced that it was slashing it share repurchase program by almost 80%, down to $720 million from an original plan of $3.35 billion. The reason? According to the company's Chairman Barry Diller, "While we remain confident in Expedia's long-term prospects and will continue to be net buyers of our shares, the terms available to us in the current debt market environment were simply unacceptable."

The ramifications here could be much broader than just Expedia. A few weeks ago, I wrote a piece called Buybacks buoy the bull. According to the Wall Street Journal, ""Companies are buying back their shares at a furious pace, one of the big reasons the Dow Jones Industrial Average is pushing toward 14000... Companies have increasingly resorted to buybacks -- which boost stock prices and per-share earnings by reducing the supply of stock in public hands -- as a way to return cash to shareholders. In doing so, they have supercharged the stock market's rally."

I love share buybacks -- it's the most efficient way to return money to shareholders. But increasingly, companies have been borrowing money to do it, and the continued tightening in the credit market could mess up buyback plans at a lot of companies, not just Expedia.

If buybacks have indeed been a big factor in the market's rise (It's so hard to isolate any one factor), a slowdown could stop the bull in its tracks.

Expedia Inc. (NASDAQ: EXPE), the online travel company, announced that it would buyback 116.7 million shares. That was in June. The company's shares quickly jumped from under $24 to $29.

Today, the company announced that the share purchase program would be reduced to 25 million shares. The stock will be bought in a price range of $27.50 to $30.00. On the announcement, Expedia's price promptly dropped to $26.50, about 9% down.

Bloomberg quotes Expedia Chairman Barry Diller as saying, "The terms available to us in the current debt market environment were simply unacceptable." The company would have added $3.5 billion in debt to cover buying back the stock.

What happened? Well, credit is getting tighter, but it is never too tight for really attractive deals. The company is not exactly minting money. In the last reported quarter, net income was $38 million on revenue of $551 million. Interest payments for the quarter were about $11 million. With the additional $3.5 billion of debt on the books, interest payments could have gone up as much as 7 times. And there would not be a good enough ratio of operating income to the sum of the old debt plus the new borrowing Expedia would have made to buy the 116.7 million shares.

The simple reason that there may not have been debt available at good interest rates is that earnings would not support it.

Douglas A. McIntyre is a partner at 24/7 Wall St.

The Wall Street Journal offers an interesting explanation for the sustained bull run: "Companies are buying back their shares at a furious pace, one of the big reasons the Dow Jones Industrial Average is pushing toward 14000... Companies have increasingly resorted to buybacks -- which boost stock prices and per-share earnings by reducing the supply of stock in public hands -- as a way to return cash to shareholders. In doing so, they have supercharged the stock market's rally."

But while the Journal seems to see this as an unsustainable phenomenon, asking "How long can they keep up?"

But I believe that the shift may be sustainable: Given the unfavorable tax treatment of dividends compared to buybacks, a shift toward buyback should cause share prices to rise. It's a more efficient way for corporations to allocate capital. In addition to the boost to EPS caused by buybacks, it is rational for investors to flock toward companies buying back shares.

It's possible that the pace of buybacks will slow down but if the bull does turn into a bear, I don't that will be looked as one of the reasons for the downturn.