Stock Buybacks

According to Ford Equity Research in San Diego, companies that have reduced by at least 5% the number of their shares (through buybacks) over the previous year have averaged annualized returns of 14% since the beginning of 1998 (through the first part of 2013) vs. a 6.8% annual return for the S&P 500. The index used by Ford is called the Buyback Achievers Index. From its late 2006 inception through May 21, 2013, the PowerShares Buyback Achievers ETF (symbol DRB) had a total return of  35.3% vs. 16.7% for the S&P 500.

 

The Hulbert Financial Digest reports the Buyback Letter (edited by David Fried) only tracks returns of stocks of companies that have announced repurchase programs. The strategy has resulted in returns that were more than 2x what the S&P 500 did over the past 15 years (ending 12/31/2012). The strategy’s success does not depend on the investor immediately reacting to the buyback announcement.

 

Academic research by David Ikenberry (University of Colorado) shows the average buyback stock outperforms the market in each of the four years following the company’s announcement of its share-repurchase program. According to The WSJ, “numerous studies over periods extending back more than three decades have found the average buyback stock outperforms the market.” A lower risk strategy is to wait and then invest in those companies that have actually started the buyback process.