Don't get caught up in the hype about share buybacks.

Usually, the repurchase programs are used to fund the employee options or to artificially increase earnings per share. In either case, value for shareholders normally is being destroyed. Today, we will look at Wyndham Worldwide's (NYS: WYN) recent share buybacks to see whether this action added or destroyed value for shareholders.

Over the years, there have been a number of studies on whether share buybacks are a good idea for a company. One study shows that when stock repurchases are announced, the stock price will increase by 3%-4% in a short period of time. Hence, the announcements benefit short-term traders, not those in it for the long run. But there is good news for the latter group; another study shows that when firms repurchase stock because the company is being undervalued, the stock exhibits positive abnormal returns of 45.3% in the four years after the announcement. The problem is, too many CEOs use this as an excuse for repurchase plans even though the stock may not be undervalued.

So what's the magic number to see whether a company is undervalued? Since he is one of the most well-respected investors of all time, I'll use Warren Buffett's level as a general baseline. He announced that Berkshire Hathaway will only buy back shares when the price of the stock divided by the book value of each share is at 1.1 or below. Book value is the total value of a company's assets. So in Buffett's case, he would not be willing to pay more than $110 per share if a company's assets were worth $100 per share.

When Wyndham was buying back shares in 2011, the stock's price/book value was at 2.4.

Clearly, this does not meet Buffett's requirements, but has Wyndham added value for shareholders? Wyndham bought back 10,203,155 shares at an average price of $29.75. The buyback effectively lowered the share count by some 6.2%. With the stock now selling at $40.02, the purchase so far has added $105 million of value for shareholders.

Competition
Now let's see how Wyndham stacks up against its competition in some key metrics and whether it is still a good time to get a piece of the action.

Company Name

Market Cap (in billions)

Current Price

Price / Earning

 Current Price / Book Value

Wyndham Worldwide $6.1 $40.02 15.8 2.6
Marriott International (NYS: MAR) $11.6 $34.54 58.8 27.0
Starwood Hotels (NYS: HOT) $10.6 $53.50 15.9 3.7                
Choice Hotels (NYS: CHH) $2.2 $36.74 20.3 N/A

Source: Yahoo! Finance and Morningstar.

Wyndham's share price has risen considerably since the buybacks, but compared to its competitors, it still looks fairly cheap. Wyndham and Starwood are right in line with each other on P/E, but Wyndham still has a P/BV that is one-third lower. Wyndham also increased its dividend by 25% in 2011, while Choice Hotels shareholders haven't seen an increased since 2008.

Foolish take
Wyndham didn't meet Warren Buffett's strict rules on share buybacks, and many organizations don't. But as of right now, these buybacks seem to have worked out and added value to shareholders. Based on the information above, I have recently given Wyndham a positive CAPScall

To find more companies that know how to treat shareholders, check out a free report detailing out 11 Rock Solid Dividend Paying Companies.

At the time this article was published At the time this article was written, Fool contributor Matt Thalman owned shares of Berkshire Hathaway and Starwood Hotels, but no other companies mentioned above. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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