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

Hot Definitions
  1. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  2. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  3. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  4. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  5. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  6. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
Trading Center