Cramer's 'Mad Money' Recap: Buybacks -- Good, Bad, Ugly

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Everybody knows we like buybacks here, but not all buybacks are good, Jim Cramer told viewers of his "Mad Money" TV show Thursday. People need to use discretion and evaluate buybacks to differentiate between the good and bad ones.

Pepsi (PEP Quote), Coke (KO Quote) and United Technologies (UTX Quote), which Cramer owns for his charitable trust, Action Alerts PLUS, have had buybacks, he said.

A buyback can be a cushion; it can be a signal that tells you management truly believes in the company long term. Some buybacks, he said, are pugnacious, such as the ones by Wells Fargo (WFC Quote) and Bank of America (BAC Quote).

These buybacks scream that the stock is too cheap and the company believes in the stock, Cramer said. The Wells Fargo and Bank of America buybacks strengthened the stocks. However, not all buybacks are good, he warned.

There are four different kinds of bad buybacks, Cramer said. They are like degenerate art -- an insult to other buybacks out there.

The first type of ugly buyback is the "borrowed" buyback. Buybacks should come out of free cash flow, he said. If you're going to have a buyback, you should have a strong balance sheet. Management should be asking what it should do with all the excess money.

"Debt is bad," he said. "Taking debt to buy back stock is insane and holds no purpose."

With every vein in his body, Cramer said he despises the buyback from Time Warner (TWX Quote), which is categorized as a borrowed buyback.

Bad buyback No. 2 is the "Botox" buyback, he said. These are the buybacks companies do to shrink their share count and make their earnings look better.

The principal company Cramer named that does this is Energizer (ENR Quote). IBM (IBM Quote) also falls into this category.