Buying earnings growth cuts both ways.

In the most recent quarter, one in four companies in the S&P 500 index is expected to have juiced its earnings per share by 4% or more by snapping up its own stock, according to S&P Dow Jones Indices. That is up from one in five at the beginning of the year.

Corporations have long bought their own shares as a way of returning excess cash to shareholders. Reducing the number of shares outstanding gives the remaining investors a larger stake in the company. Buybacks also are often a sign of a company’s confidence in its future.

The other side of the blade: Some shareholders and analysts are questioning why companies aren’t instead plowing more money back into their business, and they say that buybacks may serve the interests of top management more than those of average shareholders.

“Executives are compensated [based] on EPS,” said Warren Chiang, a managing director at investment firm Mellon Capital Management Corp. EPS growth, he added, is “the primary reason they do buybacks.”

After a dip in the second quarter, companies have been buying back their shares at the quickest clip since the recession, and the pace is expected to accelerate through year-end.

Among those that have invested most aggressively in their own stock are Ingersoll-Rand PLC, Illinois Tool Works Inc., and FedEx Corp. , which all have reported year-to-year EPS growth in the latest quarter at least 13 percentage points higher than their gains in overall profit.

Ingersoll-Rand and Illinois Tool spokeswomen said one-time events were partially responsible for the discrepancy between net income and EPS growth. FedEx didn’t provide comment.

While the economy has crawled back to life, many businesses remain reluctant to buy new equipment, build factories or hire workers. They blame the uneven recovery that has left many Americans behind and foreign markets that are stumbling.

Repurchases, meanwhile, can boost a company’s curb appeal. Illinois Tool Works used buybacks to post an EPS surge of 33%, nearly twice the latest quarter’s bottom-line profit growth. Bed Bath & Beyond Inc. ’s stock purchases turned a 10% drop from a year earlier in overall profit into a penny improvement in EPS. The housewares retailer didn’t provide comment.

Flouting Wall Street’s conventional wisdom of “buy low, sell high,” companies tend to vacuum up their stock as prices rise, and dial back purchases when prices swoon, said Gregory Milano, chief executive of business consulting firm Fortuna Advisors LLC. Plus, he said, companies that avoid buybacks usually outperform those that embrace them over the long term.

“It’s kind of like a kid in school. A lot of kids are motivated by getting the best grades they can; other kids are focused on learning as much as they can,” he said. While the child with better marks might have a leg up entering the workforce, “the kid who understands it better has a better career.”

Of course, there are times when companies are awash in cash. Home Depot Inc. has bought back almost $50 billion of its shares since 2002. And CFO Carol Tomé says she is content to pursue this strategy as long as the home-improvement retailer’s stock price is below what she believes is its intrinsic value.

“If you’re cash rich, and you have no better place to put it,” she said. “We’re such a cash cow. The last thing we’re going to do is sit on cash. That is value-destroying to our shareholders.”

In addition, a well-executed buyback can charm money managers. Northrop Grumman Corp. has “done an A-plus job in our mind,” because it has been buying shares at an attractive valuation, and Lockheed Martin Corp. has “done a similarly good job,” said Matt Lamphier, a portfolio manager at First Eagle Investment Management, a major shareholder in both defense companies.

Finance chiefs bristle at the idea that buybacks are just a mechanism to burnish EPS numbers or pad their bonuses.

“If you’re doing the top-line growth, buying back stock is just a means of returning capital to shareholders,” said John Geller Jr. , CFO of Marriott Vacations Worldwide Corp. , which announced this month it would buy back 10% of its shares. Plus, he added, “most investors are fairly sophisticated,” and can tell the difference between real and fabricated growth.

Still, investors should expect a year-end spending spree. While about 8% of a year’s buybacks historically take place October, the peak is in November, with 14% of repurchases, and another 10% come in December, according to David Kostin, senior U.S. equity strategist at Goldman Sachs Group Inc.

Late last year, Stanley Black & Decker Inc. said it would buy back as much as $1 billion of its stock, or 7% of its current market value, by the end of 2015. But, CFO Donald Allan Jr. acknowledges that the tonic effects of such deals are temporary.

Buybacks alone “might help your stock price performance and your company’s performance for a two- to three-year period,” he said, “but it’s not going to help the performance of the company over a decade.”

Write to Maxwell Murphy at and John Kester at


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