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 FAQS
  1. What is an odd-lot buyback?

    An odd-lot buyback occurs when a company offers to purchase shares of its stock back from people who hold less than 100 shares. ...
  2. What is the difference between redemption of shares and repurchase of shares?

    Sometimes, shares of stock offered by a company are not regular, market-driven common shares. Instead, they may be preferred ...
  3. What is the difference between a stock buyback and management buyout?

    Each share of stock sold in the market represents partial ownership in the issuing company. If an individual or entity buys ...
Related Articles
  1. Investing

    How Your Vote Can Change Corporate Policy

    Shareholders are getting a bigger say in how companies are run. Find out how you can be heard.
  2. Investing Basics

    Will Corporate Debt Drag Your Stock Down?

    Borrowed funds can mean a leg up for companies or the boot for investors. Find out how to tell the difference.
  3. Markets

    6 Bad Stock Buyback Scenarios

    Buying back shares can be a sensible way for companies to use extra cash. But in many cases, it's just a ploy to boost earnings.
  4. Investing Basics

    The Importance Of Corporate Transparency

    Clear and honest financial statements not only reflect value, they also help ensure it.
  5. Investing Basics

    Impact of Share Repurchases

    Share repurchases can have a significant positive impact on an investor’s portfolio and are a great way to build investor wealth over time.
  6. Investing

    A Breakdown Of Stock Buybacks

    Find out what these company programs achieve and what it means for stockholders.
  7. Markets

    How Buybacks Warp The Price-To-Book Ratio

    Relying on price-to-book can get ugly if a company has repurchased stock. Learn why.
  8. Investing

    The Impact Of A Stronger Dollar In The Markets

    The economy continues to improve, but also demonstrated that some areas of the stock market are more vulnerable to an increase in interest rates.
  9. Chart Advisor

    These 4 Swing Trades Could Place You in the Money

    Take advantage of moves both higher and lower with swing trades based on trend channels.
  10. Retirement

    Strategies To Build Your Retirement Portfolio

    Retirement indexes are designed to estimate how much an investor would need to have saved today to generate annual income in retirement, starting at 65.

You May Also Like

Hot Definitions
  1. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  2. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  3. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  4. Law Of Supply

    A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity ...
  5. Investment Grade

    A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such ...
  6. Fringe Benefits

    A collection of various benefits provided by an employer, which are exempt from taxation as long as certain conditions are ...
Trading Center