If you're Procter & Gamble, Convergys, Merck or any of a slew of major companies, you implement a stock buyback.

        “At current prices, we're aggressively repurchasing,” said Gary Rhodes, spokesman for Kroger Co. The Cincinnati-based supermarket chain is continuing its $1 billion buyback plan announced last year.

        Announcements of new buyback plans and increased programs have flooded the news recently, as skittish investors sent stock prices tumbling.

        Companies hope repurchasing their own stock will achieve two goals: Increase their earnings per share, and perhaps more importantly, restore that lagging investor confidence.

Supply and demand

        Stock repurchase programs are a lesson in the law of supply and demand. The basic economic principle says that as either supply shrinks or demand rises, a price will go up. Buybacks can affect both those dynamics.

        “You remove shares outstanding,” said Chuck Stutenroth, vice president and senior portfolio manager at Fort Washington Investment Advisors. “Therefore, earnings are spread over fewer number of shares, and therefore earnings per share increases.”

        And with earnings per share, or EPS, being a prime way that stock prices are valued, boosting that number should logically boost value.

        “I'm very keen about the program,” said Paul Chellgren, chairman and CEO of Ashland Inc. The Covington company has repurchased about 11 million shares over the last four years — 290,000 of them this past spring. “I think it can be an excellent use of free cash flow ... but you have to be careful and prudent.”

Sign of confidence

        But Mr. Stutenroth said the psychology behind stock buybacks might be more important, especially in the current negative-sentiment climate.

        That's because it signals a company's confidence in its own fundamentals.

        “A company has many choices to use its excess cash flow,” Mr. Stutenroth said, noting that a firm could use its cash to buy another company, increase its dividend or otherwise reinvest in itself.

        Shrinking supply, boosting demand, bolstered confidence. That is a combination that should equal increased share prices.

        Looks like it's starting to work.

        Take P&G, which announced Monday that it would resume repurchasing its own stock after a one-year hiatus.

        P&G's shares climbed 4.5 percent that day, while the Dow Jones Industrial Average sank 3 percent.

        Convergys also climbed 2.8 percent Tuesday, while the market continued to fall, when the company announced it was increasing its stock repurchase program from 10 million to 15 million shares, to take advantage of the depressed share price.

        Contact Amy Higgins at 768-8373; e-mail ahiggins@enquirer.com; or 312 Elm St., Cincinnati 45202. She regrets that she cannot reply to all individual questions.

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