By Roy Strom and Matt Daily

NEW YORK (Reuters) - Companies are pouring their cash stockpiles into buying back their own shares, betting on a Wall Street rebound rather than investing in new operations or bumping up dividends.

And though investors cheered the moves during the market's recovery rally on Thursday, the strategy may not ultimately pay off for shareholders as buybacks are often a sign companies see few good opportunities to expand through building an additional factory, buying equipment or acquiring another company.

Buybacks, while boosting earnings per share, can deny shareholders a dividend increase, which would allow them to decide how to spend or invest the excess cash a business is throwing off.

And when executives take the less-optimistic road it is a bad sign for a faltering economic recovery and for job creation. The U.S. unemployment rate is at 9.1 percent even as corporate earnings growth has been strong and plenty of cash has been built up on balance sheets.

Buybacks are "a way to deploy capital without really being locked into anything," said Rob Leiphart, analyst at Birinyi Associates.

The 2008 global credit crisis prompted companies to hoard cash, a strategy they are sticking with now as the economy struggles and markets are in turmoil. Federal Reserve data showed cash and short-term investments swelled to $1.91 trillion at the end of the first quarter, up 8 percent from the previous year and 45 percent from 2009.

As of August 11, U.S. companies had bought back $305.2 billion in shares so far this year, eclipsing the $300.7 billion total for all of 2010 and two-and-a-half times the 2009 amount.

While buybacks may sound nice to shareholders, Leiphart said studies have shown there is no correlation between those announcements and stock price performance.

Investors who buy shares based on company buyback announcements often have no idea when or even if those repurchases will take place, or if the companies will make the buybacks at prices that will pay off down the road.

"Some of these companies are making announcements for which they do not actually intend to do the buyback. It's simply a psychological support to their stock," said Henry Schacht, CEO of Schacht Value Investors.

And companies historically have not been the best judges of whether their shares are undervalued, buying often when they are close to their peak and failing to buy when shares are about to recover after sliding.

For example, buybacks reached a record level of $634 billion in 2007, the same year the S&P 500 peaked and began its 18-month dive.

"Do they see around corners? Do they know when the black swan is going to fly? No more than you or me," said Charles Biderman, CEO of Trim Tabs Research.

BUYBACK BANDWAGON

Buybacks can also be one strategy for companies trying to get investor focus switched away from bad news.

On Thursday, Internet company AOL <AOL.N> announced a $250 million buyback of its shares, which had slumped 32 percent since it released quarterly earnings on Tuesday. By late Friday morning the shares had recovered some of those losses to be at $11.75 against a year low of $10.06 on Wednesday.

"I believe the stock is undervalued, and I think our operational results will be the fastest way for us to bring the value of the stock up," AOL Chief Executive Tim Armstrong told analysts earlier this week.

On Wednesday, Rupert Murdoch's News Corp <NWSA.O>, which is still enmeshed in the U.K. hacking scandal, said it would speed up a $5 billion buyback of its shares, which had shed 20 percent in a month as the company scrapped a planned takeover as it came under scrutiny for a phone-hacking scandal.

Those companies joined Covidien Plc <COV.N>, Kohl's <KSS.N>, Loews <L.N>, Disney <DIS.N>, General Growth <GGP.N>, Pfizer <PFE.N>, Visa <V.N>, Ingersoll Rand <IR.N>, Home Depot <HD.N>, Best Buy <BBY.N>, Hartford Financial <HIG.N>, CF Industries <CF.N>, Capital One <COF.N>, Sunoco <SUN.N>, Fidelity National <FNF.N>, Illinois Tool Works <ITW.N>, Quebecor <QBRa.T> and TiVo Inc <TIVO.O>,which have all recently targeted their own shares.

For some companies, the attraction of a buyback can even trump acquisitions. Last week, payment processor Fidelity National Information Services' <FIS.N> dropped plans to buy British software company Misys <MSY.L>. Instead, it used the cash to buy back shares.

Still, companies are keen to show they aren't passing up good investments to grow their businesses.

Fertilizer company CF Industries says its plans to scoop up $1.5 billion of its shares will not stop it from buying up other companies or growing its operations.

"We don't believe these actions will hamper our ability to consider other opportunities to increase shareholder value through investment or acquisition when they arise," CF CEO Steve Wilson said this week.

SOAK UP THE FLOAT

Analysts warn that investors should be especially wary of companies that use buybacks simply to soak up extra shares that have entered the market through their employee compensation programs.

Those companies use buybacks to reward employees at the expense of shareholders, since the growing number of shares dilutes earnings per share for existing shareholders.

"They don't want you to see a growth in shares outstanding, because when you see this share creep, it is a horrible kind of inflation. That's a hole that's been cut in the shareholder's pocket," Schacht said.

Schacht cited Loews Corp as a good example of a company that has put its cash to good use buying its own shares.

"We've dramatically outperformed the market, and I would say a significant contributing factor to that outperformance is we bought in shares," Jim Tisch, CEO of Loews told Reuters.

Tisch said he decides himself whether the company should be in the market buying share based on the stock price and his analysis on Loew's value.

(Additional reporting by Jennifer Saba and Ernest Scheyder, Writing by Matt Daily. Editing by Martin Howell)