DEFINITION of S&P 500 Buyback Index
S&P 500 Buyback Index is an index designed to track 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.
BREAKING DOWN S&P 500 Buyback Index
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 that are aggressively buying back their own shares. 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).
From 2013-2017 and continuing into early 2018, share buybacks had increased to multi-year highs as companies were flush with cash on account of record earnings and the ability to borrow at interest rates near historic lows. As of April 2018, the biggest sector contributors to the S&P 500 Buyback Index were financials (approximately 27%), consumer discretionary (24%), information technology (19%), industrials (11%) and health care (8%).
The positive reception by investors to share buybacks can be gauged by the outperformance of the S&P 500 Buyback Index relative to the S&P 500. The comparative chart is shown on the factsheet prepared by Standard &Poor's, as are other attributes such as valuation fundamentals (price-to-earnings ratios) and risk metrics. As they say, past performance is no guarantee of future performance, so with this index - and for any other index that has outperformed a chosen benchmark - an investor should be mindful of what drives performance and reassess the index before making investment decisions based on it.