Investing

How to Beat the Market, Factor 2: Buyback Yield and Total Shareholder Return

S&P 500 Buyback Yield Achievers beat the market

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:

  1. The company’s business is profitable and cash-generating enough to consider buying back its own shares, and
  2. 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.

S&P 500 Buyback Yield Achievers beat the market
S&P 500 Buyback Achievers beat the S&P 500, source: Bloomberg

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…

Solactive Japan Buyback Yield Strategy Outperforms the TOPIX and the Nikkei
Buyback yield also outperforms in Japan, source: Bloomberg and Solactive

… and in Europe:

Solactive Europe Buyback Yield Strategy Outperforms the EuroSTOXX
Beating the EuroSTOXX with Buyback Yield, Source: Bloomberg and Solactive

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