If a company is confident enough to buy itself, shouldn’t we?
No matter the region, sector, or style, 12-month share buybacks have proven to be a consistent performance booster.
At iQUANT.pro, we have recognized the significant impact that share buybacks can have on the performance of a company's stock, which is why we have integrated this factor into many of our equity models. By repurchasing their own shares, companies can reduce the number of outstanding shares, potentially boosting earnings per share and, in many cases, leading to an increase in stock prices. Let’s take a closer look at the historical advantages of investing in companies that engage in share buybacks.
Understanding Share Buybacks
Before examining the historical benefits, it's important to grasp what share buybacks actually entail. Also known as stock repurchases, share buybacks occur when a company decides to buy back its own shares from the open market. This action reduces the number of shares outstanding, effectively increasing the ownership percentage for remaining shareholders and often boosting the stock price.
Companies may choose to buy back shares for a variety of reasons, such as expressing confidence in their future prospects, effectively utilizing excess cash, or supporting their stock price. Over the years, share buybacks have been a key element in the capital allocation strategies of many successful companies.
The Historical Benefits of Share Buyback Stocks
Enhanced Shareholder Value: Historically, companies that regularly repurchase their own shares tend to outperform their peers. For instance, a study by JP Morgan revealed that from 1990 to 2018, companies within the S&P 500 that engaged in share buybacks outperformed the broader market by an average of 2% annually. This consistent outperformance highlights the ability of buybacks to drive shareholder value over time.
Tax Efficiency: Unlike dividends, which are immediately taxable, the gains realized from share price appreciation due to buybacks are only taxed when investors sell their shares. This delay makes share buybacks a more tax-efficient method for companies to return capital to shareholders, allowing investors to defer taxes until they decide to sell.
Flexibility in Capital Management: Compared to dividends, share buybacks offer companies greater flexibility. Dividends, once initiated, set an expectation for regular payments, which can become a financial strain during economic downturns. On the other hand, share buybacks can be adjusted based on market conditions and the company's financial health, allowing for more dynamic capital management. For example, during the 2008 financial crisis, many companies opted to pause or reduce buybacks, conserving cash flow in uncertain times and showcasing the strategic flexibility of this approach.
Signaling Mechanism: Announcing share buybacks often serves as a signal to the market that management believes the stock is undervalued. This can enhance investor confidence and spark increased buying activity, leading to a positive momentum in the stock price. A study by Credit Suisse found that companies announcing buybacks experienced an average stock price increase of 3.6% over the following year, underscoring the positive impact of buybacks on stock performance.
Real-World Performance: A Closer Look
To understand the real-world impact of share buybacks, let's examine a few historical examples:
Apple Inc.: Apple is a notable example of a company that has heavily relied on share buybacks. Since it started its buyback program in 2012, Apple has repurchased over $500 billion worth of its own shares. Between 2012 and 2022, Apple’s stock price soared by roughly 800%, significantly outpacing the S&P 500’s 300% gain over the same period. This impressive growth can be partly attributed to the reduction in outstanding shares, which has enhanced earnings per share (EPS) and overall shareholder value.
Microsoft Corp.: Microsoft has also been a strong advocate of share buybacks, repurchasing around $130 billion of its stock from 2010 to 2020. During this time, Microsoft’s stock climbed nearly 600%, compared to a roughly 180% gain for the S&P 500. These buybacks have played a vital role in Microsoft’s capital return strategy, significantly boosting shareholder returns alongside dividends.
The S&P Buyback Index: The S&P 500 Buyback Index, which tracks the performance of the top 100 stocks with the highest buyback ratios, has consistently outperformed the broader S&P 500 over the past two decades. From 2000 to 2020, the Buyback Index delivered an annualized return of 12.7%, compared to 9.6% for the S&P 500, demonstrating the long-term effectiveness of buybacks as an investment strategy.
iQUANT.pro’s Multi-Discipline Approach
At iQUANT.pro, we understand that achieving Alpha requires more than just a single strategy. That's why our models employ a multi-discipline approach, analyzing various factors such as valuation, earnings growth, price momentum, capital efficiency (including share buybacks), volatility, and earnings quality. This comprehensive approach enables us to create models that seek to be effective across different market conditions.
By blending share buybacks with other technical or fundamental factors, iQUANT has created robust strategies that deliver solid returns relative to our benchmarks. Our equity models are designed to capture the historical benefits of share buybacks while remaining nimble enough to navigate any type of market. This balanced approach gives our models the best chance to adapt to changing economic conditions and market trends, aiming to offer our members access to consistent Alpha.
Conclusion: A Strategy Worth Considering
For investment advisors aiming to enhance their clients' portfolios, investing in iQUANT models that utilize share buyback as a screening factor offers a compelling opportunity. The historical benefits of enhanced shareholder value, tax efficiency, flexibility in capital management, and positive signaling make share buybacks a valuable strategy for achieving long-term growth.
Here is a list of buyback-specific iQUANT models. To learn more about any of these models, visit the Model Finder page and type the first few letters of the model name into the “Search” box.
| Model Name | YTD | 1-Year | 3-Year | 5-Year | 10 Year | 20 Year |
|---|---|---|---|---|---|---|
| iQ All Cap Share Buyback Model | 22.13 | 30.81 | 18.27 | 17.84 | 17.02 | 17.86 |
| iQ International Buyback & Dividend Model | 10.50 | 18.17 | 5.47 | 14.69 | 10.09 | 13.85 |
| iQ Large Cap Share Buyback Model | 15.57 | 23.01 | 14.14 | 14.51 | 14.76 | 14.10 |
| iQ Share Buyback Screamers Model | 13.42 | 13.44 | 5.01 | 12.26 | 13.74 | 17.95 |