Booyah Breakdown: Buybacks

Editor's note: Welcome to "Booyah Breakdown," an explanation of certain terms and topics Jim Cramer discusses on his "Mad Money" TV show. Feel free ask a question if you're confused about something Cramer talks about, but please keep in mind that we do not provide advice on specific stocks.

On Fashion Avenue, big chunky belts and anything black, with gold accents and splashes of red, are this season's fashion rage.

Travel downtown to Wall Street, and while navy suits still prevail, stock buybacks have become the hot new corporate accessory these days.

Stock buybacks have more than doubled over the last two years. Of the S&P 500's $186.3 billion in aggregate operating earnings from the first quarter of 2006, $53.3 billion was paid out in dividends and a whopping $101.8 billion was used for stock buybacks, according to Dirk Van Dijk, director of research at Zacks Investment Research. In the first quarter of 2004, only $42.9 billion was used for buybacks.

Buybacks, a.k.a. share repurchases, can be a great thing for shareholders. When a company takes some of its shares out of the market place, the shares you own give you a bigger piece of the pie.

That's why Cramer's a big fan of buybacks. He spent a good part of a "Mad Money" show earlier this month discussing them. And while he extolled the good, he also pointed out the bad. For instance, some companies clearly use buybacks to manipulate their numbers.

Remember, earnings per share are calculated by dividing net income by the total number of shares outstanding. So if you want to increase your EPS, the company needs to either increase net income or decrease the outstanding shares.

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