The Ultimate Leading Indicator?

If a company is confident to buy its own stock, shouldn't we? After all, a company knows more about itself than any Wall Street analyst.

Corporations sizes and sectors participate in share repurchase, or stock buyback, programs. Generally, companies that participate in share repurchase programs are carrying cash on the balance sheet in excess of what is needed to fund daily operations and growth opportunities.

iQuant has observed (both real-time and hypothetically) the consistent excess returns of a universe of companies that had purchased their own shares of stock over the last 12 months. Our research has focused on 12-month change in actual shares outstanding as it avoids possible false signals generated by mere buyback announcements.

Performance tests reveal that 12 month share change has produced superior returns. In addition, shares outstanding reductions of as little as 1% has generated excess returns across all cap sizes. Share reductions of greater than 5% produced even higher excess returns.

The following charts display the historical alpha generated by companies that participate in share repurchase programs.

Large Cap Stocks (Jan, 1976 – Dec, 2017)

Screen Shot 2018-05-08 at 9.48.57 PM.png

Assumptions:

  • Largest 500 domestically-traded stocks as defined by market capitalization.

  • Returns assume equal-weighting and quarterly rebalancing.

  • Each quintile consists of 100 stocks

  • Share buyback represents a 12-month change in shares outstanding
     

Mid Cap Stocks (Jan, 1976 – Dec, 2017)

Screen Shot 2018-05-08 at 9.48.28 PM.png

Assumptions:

  • Next largest 500 domestically-traded stocks as defined by market capitalization.

  • Returns assume equal-weighting and quarterly rebalancing.

  • Each quintile consists of 100 stocks

  • Share buyback represents 12-month change in shares outstanding


Small Cap Stocks (Jan, 1976 – Dec, 2017)

Screen Shot 2018-05-08 at 9.49.56 PM.png

Assumptions:

  • Next largest 500 domestically-traded stocks as defined by market capitalization.

  • Returns assume equal-weighting and quarterly rebalancing.

  • Each quintile consists of 100 stocks

  • Share buyback represents 12-month change in shares outstanding

As you can see, companies that purchased the greatest percentage of outstanding shares over a 12-month period outperformed companies in the lower quintile of share buyback – regardless of market capitalization.