DEFINITION of 'Buyback Ratio'

The buyback ratio of the amount of cash paid by a company for buying back its common shares over the past year, divided by 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.

BREAKING DOWN '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 U.S. companies that have repurchased at least 5% of their outstanding shares over the past 12 months. The S&P 500 Buyback Index has shown that it can consistently outperform the broader S&P 500 index over stretches of time.

RELATED TERMS
  1. Float Shrink

    A reduction in the number of a publicly traded company’s shares ...
  2. Boon

    Boon is a short-term upturn in for investors, marking any event ...
  3. Accounting Ratio

    Accounting ratios, also known as financial ratios, are used to ...
  4. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ...
  5. S&P 500/Citigroup Value Index

    The S&P 500/Citigroup Value Index is a market-cap-weighted index ...
  6. Share Repurchase

    A share repurchase is a program by which a company buys back ...
Related Articles
  1. Investing

    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.
  2. Investing

    A Breakdown Of Stock Buybacks

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

    Why Buybacks Might Spell Bad News for Investors

    Buybacks have helped drive stocks higher since 2009 and have accelerated in 2016. Is this still good news for investors?
  4. Investing

    10 Stocks Poised To Outperform On Record Buybacks

    Buybacks are at a 10-year high and may fuel more stock market gains
  5. Investing

    The Share Buyback Report: The Telecom Sector (T, VZ)

    Examine telecommunications sector share repurchase data to identify which companies and catalysts drove buyback trends between 2006 and 2015.
  6. Investing

    10 Stocks That Will Thrive On Buybacks

    Buyback Boost: Repurchases are more likely to bolster these stocks
  7. Investing

    The Share Buyback Report: The Energy Sector (XOM, CVX)

    Examine historical share repurchase data for the energy sector. Review buyback activity over time, and find out which companies return the most capital to shareholders.
  8. Investing

    Have $2 Trillion in Buybacks Paid Off?

    Major U.S. companies have spent trillions on buybacks with only a modest impact on stock prices.
  9. Investing

    Buyback Fever: What's Driving the Buying Spree

    American companies are stepping up buybacks in anticipation of Trump's planned repatriation tax holiday.
  10. Investing

    Execs Profiting From Record Buybacks: SEC Official

    Insiders sold some $500,000 in stock daily in the 8 days following a buyback notice, a 400% surge.
RELATED FAQS
  1. What Is an Odd-Lot Buyback?

    Odd-lot buybacks involve lots of less than 100 shares. Learn how companies get these shares back. Read Answer >>
  2. How do share redemptions and repurchases differ?

    Share repurchases happen when a company purchases shares back from its shareholders. Redemption is when a company requires ... Read Answer >>
  3. What Is Treasury Stock?

    Find out about shares called treasury stocks that were once part of shares outstanding for a company, but have since been ... Read Answer >>
  4. What are the drawbacks of using the Dividend Discount Model (DDM) to value a stock?

    Understand how the dividend discount model works, and learn some of the inherent flaws in the model that make it suspect ... Read Answer >>
Trading Center