Performance of Stocks Experiencing Buybacks

Don FishbackStock MarketLeave a Comment

Yesterday, I wrote about equity flows and mentioned how corporations were buying back massive amounts of stock. I want to expand on that a bit.

First, announced buybacks have set a record in 2018, eclipsing the $1 trillion mark.

What I wanted to do is see how the stocks experiencing buybacks performed compared to the general market. That is, do stocks experiencing buybacks do better than those that are not buying back stock.

The easiest way to do that is to compare two total return indexes (total return means dividends have been factored in).

The two indexes are the S&P 500 Total Return Index and the S&P 500 Buyback Index (Total Return).

“The S&P 500 Buyback Index¬†measures the equal-weighted performance of 100 companies with the highest buyback ratio in the S&P 500. The buyback ratio is calculated as the amount paid for common share buybacks divided by the total market capitalization of common shares at the beginning of the observation period.”

So comparing the market total return to the total return of stocks experiencing the highest levels of buybacks will allow us to see if buybacks add value.

Here’s a 20-year chart showing the performance of the Buyback Index (SPBUYUT in green) to the benchmark total return index (SPXTR in purple). It’s pretty clear that stocks experiencing buybacks did much better than the overall market.

 

 

Let’s take a look at more recent data. This is chart showing the last 5 years.

Note that the Buyback is LAGGING. That is, the stocks experiencing the biggest buybacks are performing WORSE than the overall market.

 

 

How about during the downturn these past three months when buybacks have shot through the roof?

Again, the Buyback stocks lag.

That is not a good showing.

It’s as if the Buyback strategy lost its edge after the big bull run in 2013. Because since then, those stocks experiencing the largest share repurchases have lagged pretty significantly.