The chart we propose shows the S&P500 Total Return Index (orange line) compared to the S&P500 Buyback Index (white line). This index was designed to measure the performance of a selection of stocks, all with equal weight, with the highest buyback ratios of the S&P500.
The "buyback ratio(or repurchase ratio) is defined as the ratio of cash used in repurchases of the company's common stock over the prior four quarters divided by the total market capitalization of common shares outstanding at the beginning of the repurchase period. In a nutshell, the ratio of treasury shares purchased by the same company to the total number of outstanding shares.
The shares of these companies have achieved a cumulative return of almost 3 times that of the generic S&P 500 over the past 20 years, as can be seen from the chart.
Here some examples of stocks present in this set:
- Coca Cola. Isin: US19122T1097
– JOHNSON & JOHNSON, US4781601046
– GameStop Corporation, US36467W1099
– Time Warner Cable Inc., US88732J2078
– Life Technologies, US53217V1098
Why did these stocks fare better? If a company buys back its own shares, it does so because it believes in itself and because it has the liquid means to do so. This is usually an indication of value, which sooner or later is reflected in the performance. Therefore, the "buyback ratio" can be an indicator to be taken particularly into consideration when evaluating a stock.
