In a recent Fortune article, Yi-Wyn Yen suggested that Yahoo’s management should announce a major buyback the way Microsoft and Hewlett-Packard did. Yi-Wyn Yen quoted Argues Canaccord Adams equity analyst Colin Gillis as saying “If Yahoo [executives] really thought the stock was worth $40, then send a signal of confidence and show us that you mean it.

When a company buys back shares of its own stock, several things happen:

1 – There are fewer shares in the open market, which makes current shareholders shares worth more.

2 – It increases the potential dividend ratio and earnings per share ratio for current investors.

3 – Most importantly, it sends a signal to the market that the company feels its stock is trading below market value and therefore is a good buy. This is often more important to people than any of the technical implications of a stock buy-back.

In the past two months, Microsoft announced a $40 billion buyback, HP made a commitment to buyback $8 billion, and just recently even Oracle announced an $8 billion buyback of its stock. If I was an active investor, I would normally interpret this as a signal that a company feels spending money on buying back shares is more valuable than spending it on something else within the company. If Microsoft were so bullish on their future outlook that they were willing to buy back $40 billion worth of stock, I’d most likely be buying the stock as well.

I find it surprising that Yahoo has not yet taken this move given the fact that they’ve recently been trading at five year low of $12. This after Microsoft offered Yahoo $33 per share just a few months ago. Yahoo’s current state of affairs has resulted in thousands of angry Yahoo investors looking for any signs of life from the company.