Float Shrink

DEFINITION of 'Float Shrink'

A reduction in the number of a publicly traded company’s shares available for trading. Float shrink can occur in a number of ways – through a buyback or repurchase of a company’s shares, an investor acquiring a large stake in a company or even through a reverse split or share consolidation. The term “float shrink,” however, is most commonly associated with share buybacks, since this is a popular way for companies to return cash to their shareholders. A float shrink achieved through a share buyback also reduces the number of total shares outstanding for a company, which has a positive impact on earnings per share and cash flow per share.

BREAKING DOWN 'Float Shrink'

Share buybacks and dividend payments are favored avenues for companies to reward their shareholders, but the two are not mutually exclusive, and most successful companies try to reward their shareholders through consistent dividend increases and regular share buybacks.

As an example of how float shrink can impact EPS, consider a company that has 50 million shares outstanding, with a float of 35 million shares. The shares are trading at $15, for a market capitalization of $750 million. The company reports net income of $50 million in a given year – call it Year 1 – for EPS of $1. In the following year (Year 2), it buys back 5 million of its shares on the open market. This buyback amounts to 10% of its total outstanding shares, or 14.3% of float (i.e. 5 million/35 million), and as a result, it now has 45 million shares outstanding at the end of Year 2.

Assume the company achieves net income of $55 million in Year 2. While net income has increased 10%, because of the share buyback, EPS is now at $1.22 (i.e. $55 million/45 million), an increase of 22%.

Recall that shares were trading at $15 at the end of Year 1, for a Price-Earnings (P/E) multiple of 15. Assuming that the P/E multiple is unchanged at the end of Year 2, the shares should be trading at $18.30 (i.e. P/E of 15 x EPS of $1.22).

Float shrink through share buybacks can boost the performance of investment portfolios, as companies with consistent buybacks may outperform the broad market index over long periods of time. For example, in the ten years ending November 2013, the S&P Buyback Index was up 158%, outperforming the S&P 500 by 90 percentage points. This outperformance has led to renewed investor focus on float shrink and the introduction of a few float shrink exchange-traded funds (ETFs).

Note that while float shrink can also be achieved through a strategic investor’s acquisition of a large stake in a company, this does not have the same positive impact as a buyback, because the total number of shares outstanding remains the same.

RELATED TERMS
  1. Share Repurchase

    A program by which a company buys back its own shares from the ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Outstanding Shares

    A company's stock currently held by all its shareholders, including ...
  4. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  5. Floating Stock

    The number of shares available for trading of a particular stock. ...
  6. Float

    Money in the banking system that is briefly counted twice due ...
Related Articles
  1. Investing

    A Breakdown Of Stock Buybacks

    Find out what these company programs achieve and what it means for stockholders.
  2. 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.
  3. Markets

    The 5 Types Of Earnings Per Share

    A look at the five varieties of EPS and what each represents can help an investor determine whether a company is a good value, or not.
  4. Fundamental Analysis

    Assess Shareholder Wealth With EPS

    Find out if management is doing its job of creating profit for investors.
  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 Basics

    Analyzing An Acquisition Announcement

    These deals can make or break investors' returns. Find out how to tell the difference.
  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. Options & Futures

    What Does Quadruple Witching Mean?

    In a financial context, quadruple witching refers to the day on which contracts for stock index futures, index options, and single stock futures expire.
  9. Professionals

    Is A Stockbroker Career For You?

    Becoming a stockbroker requires a broad skill set and the willingness to put in long hours. But the rewards can be enormous.
  10. Fundamental Analysis

    5 Predictions for the Chinese Stock Market in 2016

    Find out why market analysts are making these five ominous predictions about the Chinese stock market in 2016, and how it may impact the entire world.
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 ... Read Full Answer >>
  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 ... Read Full Answer >>
  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 ... Read Full Answer >>
  4. Where do penny stocks trade?

    Generally, penny stocks are traded through the use of the Over the Counter Bulletin Board (OTCBB) and through pink sheets. ... Read Full Answer >>
  5. Where can I buy penny stocks?

    Some penny stocks, those using the definition of trading for less than $5 per share, are traded on regular exchanges such ... Read Full Answer >>
  6. How does the stock market react to changes in the Federal Funds Rate?

    The stock market reacts to changes in the federal funds rate in various ways depending on where it is in the business cycle. ... Read Full Answer >>
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center