US firms that authorise and announce share repurchase programmes, aka buybacks, have historically shown statistically and economically significant outperformance following the announcements, according to a report issued by S&P Capital IQ.
This research, authored by S&P Capital IQ’s Quantamental Research team, also indicates that outperformance is greatest in smaller market capitalisation stocks, and historically has continued even past the first few trading days following the announcement.
Recognising that share repurchase programs have become increasingly prevalent over recent years – often replacing dividends as a common method of returning shareholder capital – the S&P Capital IQ report, entitled, “Buying Outperformance: Do Share Repurchase Announcements Lead to Higher Returns?,” examines the returns surrounding buyback announcements to test whether, and when, buyback programs signal subsequent outperformance and add shareholder value.
“The goal of our research is to help investors identify those drivers that allow them to consistently beat a broad-based equity benchmark,” says David Pope, managing director of quantitative research. “In this case, we observed that stocks on average outperformed the equally weighted Russell 3000 by 0.60 per cent over one month, and by 1.38 per cent over one year periods following buyback announcements. Stocks also outperformed their sector and peer groups of similar size and value over the period Jan 2004 to July 2013.”
Outperformance is greatest among small caps or larger buybacks as a per cent of shares outstanding.
European stocks showed 12 month post-buyback outperformance, but no significant excess returns over shorter one month post-announcement periods.