During the financial crisis, many investors were like many companies, watching the economic sidewalk roll up underneath them as the prices of many assets – stocks, housing, commodities – fell off a cliff.
The last thing shareholders were demanding was a bigger slice of corporate cash coffers.
Things have changed.
With investors having become keen to the idea that many companies made it through the economic downturn by building mounts of cash, shareholders have begun to want their share – and in some cases, have been snapping up the stocks of companies that have been willing to use stock buybacks to transfer value back to investors.1
This development is behind our new Buyback Leaders motif, a portfolio of stocks of companies that have recently been stepping up repurchases.
While buybacks are certainly no panacea for a stock of a company with long-term problematic operational deficiencies, in general they can offer a way to nominally return cash to shareholders, by decreasing the number of outstanding shares, and if all goes according to schedule, can boost earnings per share figures.
And it’s worth noting that some investors also see a predictive effect: If companies are spending their cash on their own shares, some investors reason, they certainly aren’t doing it because they expect those shares to fall in value.
Regardless of the accuracy of that premise, there is no disputing that many stocks of companies using buybacks have been long-term outperformers.
The S&P 500 Buyback Index – comprising 100 companies in the S&P 500 with the highest buyback ratio, i.e. cash paid for the buying back of common stock divided by the total market capitalization of common stock – has gained 250% since Dec. 31, 1999.2
The S&P 500 itself? 20%.
Naturally, that return means little for buyback stocks in the future, either generally, or specifically with the stocks in our new motif.
However, investors who believe buyback stocks could continue to outperform may want to consider this option.
1Gene Marcial, “Companies Focused on Stock-Buyback Programs Attract Pros In Current Market Environment,” forbes.com, Aug. 5, 2013, http://www.forbes.com/sites/genemarcial/2013/08/05/companies-focused-on-stock-buyback-programs-attract-pros-in-current-market-environment/, (accessed Oct. 30, 2013).
2Matthew Boesler, “Stocks With Huge Buyback Plans Have Absolutely Been Crushing It,” businessinsider.com, Oct. 29, 2013, http://www.businessinsider.com/sp-500-buyback-index-outperformance-2013-10.