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?
The buyback yield reflects the percentage of a company’s market capitalization (or “market cap”) returned to common shareholders in the form of stock buybacks.
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.
What is a Good Buyback Ratio?
Generally speaking, for corporations with aggressive stock buyback programs, maintaining a high buyback ratio is not a sustainable, long-term strategy to drive shareholder returns.
Rather, a high buyout ratio is the function of a corporation with a strong fundamental profile in terms of profitability and growth trajectory, i.e. it is the consequence, not the cause.
For example, a notable public company with one of the most significant share repurchases is Apple (AAPL). From 2012 to the end of fiscal year 2022, Apple spent in excess of $572 billion on stock buybacks.
However, the notion that stock buybacks can create long-term shareholder value is a controversial topic, as many critics perceive share repurchases as near-term oriented tactics to cause an artificial rise in its market value per share.
The market value of a company frequently rises following the buyback, yet the fundamental drivers of valuation – e.g. revenue growth, profit margins, and free cash flow generation (FCF) – remain the same, which is the premise of the argument that stock buybacks do not create real shareholder value.
Buyback Ratio by Sector (Source: S&P Capital IQ)
How to Calculate Buyback Yield
The buyback yield is calculated as the total value of share buybacks in a given period divided by the company’s market capitalization at the beginning of the period, with the most common periodicity used in the ratio being the next twelve months.
The step-by-step process to calculate the buyback yield is as follows.
- Shares Repurchases → Determine the total number of share repurchases conducted by a company over a given period.
- Stock Repurchase Price → Identify the prices at which each share repurchase occurred.
- Gross Stock Buyback Value → Multiply the number of shares repurchased for each tranche by the coinciding repurchase price to determine the total value of a company’s stock buybacks.
- Net Stock Buyback Value → Subtract the gross stock buyback value by the value of the new stock issuances in the matching period.
- Market Capitalization → Determine the company’s market cap at the beginning of the period, which equals the product of the company’s beginning total share count on a diluted basis and the initial market share price.
- Buyback Yield → Divide the total value of the share buybacks by the market capitalization at the beginning of the period.
- Conversion to Percentage → Multiply the resulting figure by 100 to convert the buyback yield into a percentage.
Buyback Yield Formula
The formula to calculate the buyback yield on a gross basis is as follows.
But since corporations frequently issue new shares over the course of a given period (e.g. stock based compensation), the following buyback yield formula – expressed on a net basis – should be used instead.
- Total Share Buybacks ($) → The total share buybacks is the total value of a company’s spending attributable to repurchasing shares.
- Total Share Issuances ($) → The total share issuances is the total value of the new issuances of stock by a company over a specified period.
- Market Capitalization ($) → The market cap of a company can be determined by multiplying the market value per share at the start of the period by the total number of shares outstanding.
The short-form formula to calculate the net buyback yield is as follows.
The resulting yield is expressed as a percentage, indicating the proportion of a company’s market cap as of the beginning of the year was returned to shareholders via share buybacks.
Simplification of Formula
The total value of share buybacks is determined as the product of the number of shares purchased and the price at which the repurchase occurred.
Therefore, it is necessary to compute the value returned using the granular data found in the public filings of the company that pertain to each share repurchase transaction.
Buyback Yield Calculator
We’ll now move to a modeling exercise, which you can access by filling out the form below.
Buyback Yield Calculation Example
Suppose a publicly traded corporation had a market capitalization of $10 billion as of the beginning of fiscal year 2022.
- Market Share Price, BoP = $20.00
- Number of Diluted Shares Outstanding, BoP = 500 million
- Market Capitalization ($) = $20.00 × 500 million = $10 billion
From the start of 2022 to the end of the fiscal year, the total monetary value of the shares repurchased to date totaled $520 million, whereas the total value of the new stock issuances amounted to $20 million.
- Market Capitalization, Beginning of FY-2022 ($) = $10 billion
- Total Shares Repurchased ($) = $520 million
- Total Share Issuances ($) = $20 million
Therefore, the net stock issuance for 2022 was $500 million, which we’ll divide by the market capitalization at the beginning of the fiscal year to arrive at a buyback yield of 5.0%.
- Stock Repurchases, net ($) = $520 million – $20 million = $500 million
- Buyback Yield (%) = $500 million ÷ $10 billion = 5.0%
In conclusion, the 5.0% buyback yield of our hypothetical corporation implies that 5.0% of the company’s market cap at the start of 2022 was returned to shareholders in the form of stock buybacks over the course of the next twelve months.