It is thought to be a useful tool for hoarding ‘Page Rank’ or used for highly targeted outbound links. But this is not what the tag is intended for. It is in fact a safe guard against Spam Links.
Previous to this tags life, web developers were nervous to publish a spammy link on there site as they could and would be punished by Google. As soon as Google-Bot identified a relationship between you and the spam site, you would be discounted in the SERP’s. So what happens if you need to link to a spam site? Do you create the suicide-link and hope Google doesn’t see it?
Thankfully Google’s Spam expert Matt Cutts and Blogger.com’s Jason Shellen created the NoFollow Tag as a way to have these links and not be punished. A simple tag added to the link would identify to Google-Bot and other search engines, that yes this is a potentially spammy link, “Don’t Follow (Crawl) This Link”. That said, if you place a nofollow tag on a trusted link. Google will still crawl that link and show the linked website that they have received an inbound link. So if you have some links out there that have been ‘nofollowed’, you have not been identified as a spam website and those links will still be shown in Google webmaster tools.
Please note: Never link to a spam website. Leading your visitors into such a domain can be potentially dangerous.