Examining Share Repurchasing and the S&P 500 Buyback Index for the US Market
Overview of Share Repurchases
Corporate payout policy has been one of the most studied areas in finance literature. If a company has limited investment opportunities, it may distribute its excess cash flow, if any, back to shareholders to mitigate the conflicts of interest between management and shareholders.
There are different ways to redistribute cash back to shareholders, including cash dividend payouts, share repurchases or a combination of both. Historically, dividends have been the dominant form of corporate payout. However, there has been a structural change in corporate payout policy, in that share repurchases have surpassed cash dividends and become the dominant form of corporate payout in the US.
The increased use of share repurchase is mainly driven by some key advantages of this method, including tax benefits and financial flexibility. View the Executive Summary
- Excess returns. In the past 20 years ended Dec. 31, 2014, share repurchases as an investment strategy outperformed the S&P 500 Index in 17 out of 20 years, with an average annual excess return of 5.5% per year, evidenced by the S&P 500 Buyback Index.
- Risk-adjusted returns. Share repurchases as an investment strategy had higher risk-adjusted returns on a 1, 3, 5, 10, 15, and 20-year time period when compared to the S&P 500 Index, evidenced by the S&P 500 Buyback Index.
- Tax efficient. Compared to dividends, share repurchases offer a company’s management a means of returning cash to shareholders in a more tax efficient manner since repurchases are not a taxable event until shares are sold.
- Payout policy shift. Share repurchases have surpassed cash dividends and become the dominant form of corporate payouts in the US.
Source: S&P Dow Jones Indices LLC. Past performance is no guarantee of future results. Index performance based on total return in USD. Average annual total returns measure the change in value of an investment assuming reinvestment of all dividends and capital gains. An investment cannot be made into an index. For more information, including the complete Buyback Index methodology, please visit www.spdji.com.
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The S&P 500 Buyback Index (the "Index") was launched on November 29, 2012. All information presented prior to the launch date is back-tested.
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