Buyback yield is one of the top factors I look for in stocks of companies I buy. Buyback yield can be thought of one of at least four components of total shareholder return, the others being book value growth, debt reduction / deleveraging yield (familiar to anyone who has paid down principal on a mortgage), and dividend yield. Buybacks often say two important things about a company:
- The company’s business is profitable and cash-generating enough to consider buying back its own shares, and
- Given the choice, the company considers buying its own shares a better investment than buying another company or paying a cash dividend
I often say in reverse that if a company can’t buy its own shares (because it doesn’t have the money), or won’t buy back it’s shares (perhaps the worse of the two signals for a non-growing company), should you want to buy its shares?
I won’t debate the details here of the different types of shareholder return, but am mostly using this post to show how well buyback yield has worked as a factor not only in the US, but also in Europe and Japan. Overall, this seems to be a more reliable and internationally consistent factor than insider sentiment.
In Japan, the S&P Buyback index actually underperformed both the Nikkei and the TOPIX, but all were significantly outperformed by the Solactive Buyback index. Solactive’s strategy worked well in Japan…
… and in Europe:
