Buyback Ratio

AAA

DEFINITION of 'Buyback Ratio'

The ratio of the amount of cash paid by a company for buying back its common shares over the past year, to its market capitalization at the beginning of the buyback period. The buyback ratio enables comparison of the potential impact of repurchases across different companies. It is also a good indicator of a company’s ability to return value to its shareholders, since companies that engage in regular buybacks have historically outperformed the broad market. Buybacks shrink a company’s outstanding share float, which improves earnings and cash flow per share, and have the advantage over dividends of offering management greater flexibility in timing.

INVESTOPEDIA EXPLAINS 'Buyback Ratio'

For example, Company A may have spent $100 million on buying back its common shares over the last 12 months, and may have had a market capitalization of $2.5 billion at the beginning of this period, in which case its buyback ratio would be 4%. If Company B spent $500 million on buying back its shares over the same period, and had a market cap of $20 billion, its buyback ratio is 2.5%. Company A has the higher buyback ratio despite spending only a fifth of the amount expended on share repurchases by Company B, because of its much lower market cap.  

Investors can invest in companies that engage in regular buybacks through indexes like the S&P 500 Buyback Index and exchange-traded funds such as the PowerShares Buyback Achievers Portfolio, the largest one in the buyback category. The S&P 500 Buyback Index includes the top 100 companies in the S&P 500 with the highest buyback ratios over the past 12 months, while the PowerShares ETF tracks the performance of US companies that have repurchased at least 5% of their outstanding shares over the past 12 months. The S&P 500 Buyback Index has consistently outperformed the broader S&P 500 index.

RELATED TERMS
  1. Leveraged Buyback

    A repurchase of significant amount of shares through the use ...
  2. Retail Repurchase Agreement

    An alternative to regular savings deposits. Under a retail repurchase ...
  3. Term Repurchase Agreement

    Under a term repurchase agreement, a bank will agree to buy securities ...
  4. Accelerated Share Repurchase - ...

    A specific method by which corporations can repurchase outstanding ...
  5. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities. ...
  6. Reverse Repurchase Agreement

    The purchase of securities with the agreement to sell them at ...
Related Articles
  1. How Your Vote Can Change Corporate Policy
    Investing

    How Your Vote Can Change Corporate Policy

  2. Will Corporate Debt Drag Your Stock ...
    Investing Basics

    Will Corporate Debt Drag Your Stock ...

  3. What is an odd-lot buyback?
    Investing

    What is an odd-lot buyback?

  4. 6 Bad Stock Buyback Scenarios
    Markets

    6 Bad Stock Buyback Scenarios

comments powered by Disqus
Hot Definitions
  1. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  2. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  3. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  4. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  5. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  6. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
Trading Center