What is Buyback Yield?
The Buyback Yield is the ratio between the value of a company’s net stock repurchases and its market capitalization as of the beginning of a period, expressed as a percentage.
What is the Definition of Buyback Yield?
Stock buybacks, often referred to as “share repurchases”, is a method for corporations to return value to its shareholders, i.e. equity investors. The rationale for stock buybacks, similar to the issuance of dividends, is to return value to investors.
In recent times, however, publicly-traded companies are increasingly more likely to utilize stock repurchases in lieu of dividends for various reasons.
- Market Signal (Undervalued Stock Price) → The decision by a corporation to repurchase shares can frequently send out a positive signal regarding management’s belief that its shares are currently undervalued by the market. The buyback of shares – assuming the current market price is in fact underpriced – should theoretically contribute towards more long-term returns for shareholders.
- Positive Growth Trajectory → Stock buybacks can reaffirm that the corporation has sufficient cash set aside to fund its near-term growth initiatives, and management’s priority remains long-term shareholder value creation. Hence, the “excess cash” belonging to the company is returned to shareholders via stock repurchases, rather than allowing the cash to sit idle on their balance sheet (and generate low yields in investment accounts).
- One-Time Event → Unlike a dividend issuance program, the occurrence of stock repurchases can be a one-time event, signaling management’s optimism around the company’s growth prospects and liquidity. In contrast, a dividend program – once formally announced to the public – is frequently interpreted as a sign that opportunities to reinvest capital into growth are starting to wane.
- Increase in Stock Price → By reducing the total number of shares in circulation in the open markets, a company can effectively cause its valuation to rise. For instance, investors often rely on the price to earnings ratio (P/E) to estimate the appropriate market value of a company’s shares. Since the reported earnings per share (EPS) metric – the denominator of the P/E ratio – increases post-buyback, the P/E ratio declines, which can potentially cause the company’s shares to rise in value to continue trading at the same P/E ratio.
- Offset Stock Dilution → The share count of a company can rise from new stock issuances and dilutive securities such as warrants, options, and stock-based compensation (SBC). The rise in shares outstanding can cause a company’s earnings per share (EPS) to decline, so share repurchases can offset the dilution in equity ownership to prevent a downward movement in the stock price.
The Power of Share Repurchases (Source: OSAM)