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

Key Takeaways:

  • 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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Performance disclosures
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.
Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. Complete index methodology details are available at www.spdji.com. It is not possible to invest directly in an index.

   Past performance of the Index is not an indication of future results. Prospective application of the methodology used to construct the Index may not result in performance commensurate with the back-test returns shown. The back-test period does not necessarily correspond to the entire available history of the Index. Please refer to the methodology paper for the Index, available at www.spdji.com for more details about the index, including the manner in which it is rebalanced, the timing of such rebalancing, criteria for additions and deletions, as well as all index calculations.
    Another limitation of using back-tested information is that the back-tested calculation is generally prepared with the benefit of hindsight. Back-tested information reflects the application of the index methodology and selection of index constituents in hindsight. No hypothetical record can completely account for the impact of financial risk in actual trading. For example, there are numerous factors related to the equities, fixed income, or commodities markets in general which cannot be, and have not been accounted for in the preparation of the index information set forth, all of which can affect actual performance.
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This document has been repurposed by Invesco based on information from S&P Dow Jones Indices LLC used with the permission of S&P Dow Jones Indices.
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