Share buybacks allow companies to repurchase their own stocks
outstanding on the market. Why do those companies want to do
this? On one hand, the number of shares held by the public will
be reduced, which will increase the earnings per share even if
the total earnings are the same. The value of shares still
available increases. It is valuable that a firm's manager buy
back shares when he believes that the firm's stock is currently
trading below its intrinsic value. On the other hand, executive
compensation is often tied to executives' ability to meet
earnings per share targets. When it is difficult to meet the
targets, the executives may repurchase shares in order not to
affect executive or managerial rewards.
Generally speaking, buybacks can be treated as a signal that the
company thinks that its stock is undervalued. Yet is this true? I
will research the S&P 500 companies and see the results. Also
I will show you which companies are good at share buybacks and
which are doing this at the totally wrong timing.
has written about them multiple times, including in his most
recent shareholder letter. His view is, if a company buys back
shares at above their intrinsic value, buybacks destroy
shareholder value. If a company buys back shares at below their
intrinsic value, buybacks create value for existing shareholders.
said he may buy back stocks at 110% of Berkshire's book. In 2012,
Berkshire spent $1.3 billion in buybacks.
Assumptions and Facts
1. My research starts from the first quarter of 2000 to the
second quarter of 2013.
2. All the quarterly share buyback data and quarterly market
capitalization data are from the database of
3. All the prices I used in this research were the quarter-end
adjusted close prices for splits and dividends. They are
originally from yahoo finance.
4. You can see the complete
S&P 500 companies list here
. My research is based on the current S&P 500 companies,
disregarding the old ones.
S&P 500 Companies
I added all the share buybacks for each quarter to get the total
share buybacks for S&P 500 companies. The result is as
From Chart 1, we can see surprisingly that the S&P 500
companies usually spent more money to buy back shares when their
stock price was high and spend less when the market price was
low. In the third quarter of 2007, S&P 500 companies spent
more than $130 billion to buy back their own shares, which
unfortunately were at the market peak. Then the market crashed.
In the first quarter of 2009, the market capitalization shrank to
almost half of the market capitalization it was in the third
quarter of 2007, yet companies only spent $31 billion to
repurchase stocks. From Chart 2, we can observe that when the
market capitalization was low, only about 30% of the S&P 500
companies bought back shares. When the market went up, more and
more companies repurchased their shares. From 2006 to 2007 and
from 2011 to 2012, more than half of the companies spent money on
buying back their shares.
As of now, the stock market is close to all-time high, about 60%
companies are buying back shares. This number is also close to an
all-time high. Does this tell us something?
How could it be possible that companies get the timing so
perfectly wrong? There can be multiple reasons for this. One
reason might be that those companies wanted to increase spending
on shares when earnings were continuing up. In this way, their
share value could go higher. Another reason is that when their
stock prices are high, the companies are more optimistic and they
think they have excess cash to spend. Unfortunately they are
usually optimistic at the wrong time.
Even though the S&P 500 companies as a whole did not perform
well at buying back their shares, some companies did do better
than others. Which companies are good at buying back stocks and
which are bad at it? The following will answer this question.
For individual companies, we want to see how the stock prices go
after share buybacks. I set four cases: 1) the one-year stock
return after share buybacks; 2) the two-year stock return after
share buybacks; 3) the three-year stock return after share
buybacks; 4) the five-year stock return after share buybacks.
Generally speaking, it is more valuable to buy back shares when
stock is undervalued. The higher the stock return after share
buybacks, the better the company is at share buybacks. Since
different companies have different market capitalizations and
different amounts of buybacks, I set a new ratio to adjust the
return by weight.
In order to have a big impact for share buyback, I only consider
the ones that were more than 0.5% in weight and ignore the
quarters that have smaller weights.
After getting the ratio for each term, I average them to get the
indicator for each company. We want to distinguish them and see
who is good at share buybacks and who is bad at it.
1. Companies which are good at share buybacks
You can easily observe the one-year, two-year, three-year, and
five-year returns on the table. Almost all stocks achieved high
returns after buying back their own shares which indicates that
companies were good at share buybacks during those periods.
2. Companies which are bad at share buybacks
You can easily observe the one-year, two-year, three-year and
five-year returns on the table. Almost all the returns were
negative which show that companies were bad at share buybacks
during those periods.
The following table shows 10 companies which are good at share
buybacks and 10 companies which are bad at share buybacks.
Not all buybacks are created equal. The skills of the management
in capital allocation and the culture of the company can make a
difference in the outcome of the buybacks. Although buybacks are
viewed as positive for stock prices, a lot of them happen at
exactly the wrong time and destroy value for shareholders.
Based on this research, GuruFocus will develop a buyback rank
system. We want to distinguish the good ones from the others. It
is more meaningful to observe buybacks from the good ones and
this buyback rank can serve as an indicator in our research,
too.About GuruFocus: GuruFocus.com tracks the stocks picks and
portfolio holdings of the world's best investors. This value
investing site offers stock screeners and valuation tools. And
publishes daily articles tracking the latest moves of the world's
best investors. GuruFocus also provides promising stock ideas in
3 monthly newsletters sent to