S&P 500 Buyback Index Definition

What Is the S&P 500 Buyback Index?

The S&P 500 Buyback Index tracks the performance of the 100 S&P 500 stocks with the highest buyback ratios over the past 12 months. The S&P 500 Buyback Index is equal-weighted and rebalanced quarterly, with the rebalancing reference dates occurring on the last trading day of each calendar quarter. Index changes are effective after market close on the third Friday of the month after the reference date.

Key Takeaways

  • The S&P 500 Buyback Index is designed to measure the performance of the top 100 stocks with the highest buyback ratios in the S&P 500.
  • Companies buy back shares with retained earnings, bidding up the share price and reducing the number of shares outstanding.
  • Although criticized by some as artificially inflating stock prices and allocating cash inefficiently by firms, share buybacks have increased dramatically over the past decade.

How the S&P 500 Buyback Index Works

The S&P 500 Buyback Index ranks the S&P 500 members in descending order of their buyback ratios every quarter and includes the top 100 in the Buyback Index. The index gives investors an avenue to invest in companies buying back shares.

The buyback ratio is calculated as the amount paid for common share buybacks divided by the total market capitalization of common shares at the beginning of the observation period.

A share buyback is a compelling route for a company to generate value for its shareholders since a buyback contracts the number of outstanding shares, improving per-share measures of profitability and cash flow like earnings per share (EPS) and cash flow per share (CFPS).

S&P 500 Buyback Index Methodology

According to S&P, the index is constructed as follows:

  • There is a three-month lag from the reference date for the observation period, which accounts for report releases.
  • The observation period is 12 months long, beginning 15 months before the reference date.
  • The buyback ratios for the stocks are calculated using the cash value paid for common share buyback divided by common share total market capitalization.
  • The total market cap from the first listing day will be used if the stock was not listed at the beginning of the observation period.
  • Stocks are ranked in descending order based on their buyback ratios.
  • The index is formed using the 100 stocks with the highest ratios.

Share Buyback Trends

The number of buybacks in the financial markets has been on the rise. The first quarter of 2022 set a quarterly record, with $280 billion in buybacks.

As of Aug. 31, 2022, the top five sector contributors to the S&P 500 Buyback Index were financials (29%), consumer discretionary (20.9%), information technology (11.3%), healthcare (11%), and industrials (8.8%).

New regulations may affect the returns investors have experienced from buybacks in the past. Starting in 2023, buybacks that meet specific criteria will be subject to a 1% excise tax. The tax is designed to slow down buybacks to try and reign in inflation.

The positive reception by investors to share buybacks can be gauged in the way the S&P 500 Buyback Index has performed relative to the S&P 500. The Buyback Index has generated an annualized total return of 13.96% over the last decade, while the S&P 500 benchmark has returned 13.08% over the same period.

If you're a retail investor looking for an index, you should talk to a professional financial advisor to find out if investing in the S&P 500 Buyback Index suits your investing goals, strategy, and financial circumstances.

Frequently Asked Questions

What Is a Buyback ETF?

A buyback exchange-traded fund is a fund that attempts to mimic the returns of a buyback index by holding shares listed on the index. For example, the iShares U.S. Dividend and Buyback ETF tracks the Morningstar U.S. Dividend and Buyback Index, which lists companies with a history of buybacks and dividends.

How Does Stock Buyback Work?

A buyback is usually announced by a company and conducted in a series of periodic repurchases. Investors can sell their stocks to the company and receive cash for their holdings. Companies use buybacks as alternatives for dividends, to consolidate ownership, or to influence share prices.

What Is a Buyback Ratio?

A buyback ratio is the cash value paid by a company to repurchase its shares over the last year, divided by the company's market capitalization when the buybacks started.

The Bottom Line

The SA&P 500 Buyback Index is a selection of 100 companies from the S&P 500 with the highest buyback ratios. Buybacks are not a new occurrence, but have become a popular method for distributing funds, increasing earnings per share, and consolidating ownership.

Article Sources
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  1. S&P Global. "S&P 500 Buyback Index Methodology," Page 3.

  2. S&P Global. "S&P 500 Buyback Index Methodology," Pages 4-5.

  3. S&P Global. "S&P 500 Buybacks Set a Record High."

  4. S&P Global. "S&P 500 Buyback Index Methodology," Page 4.

  5. Financial Industry Regulatory Authority. "How Companies Use Their Cash: The Buyback."

  6. PriceWaterhouseCooper. "U.S. Financing Guide: 9.2 Share Repurchases."

  7. S&P Global. "S&P 500 Buybacks Set Quarterly and 12-Month Records - Again."

  8. S&P Global. "S&P 500 Buyback Index: Data."

  9. Congressional Research Service. "Tax Provisions in the Inflation Reduction Act of 2022 (H.R. 5376)," Page 3.

  10. S&P Dow Jones Indices. "S&P 500 Buyback Index," Download Factsheet, Page 2.

  11. iShares. "iShares U.S. Dividend and Buyback ETF."

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