Buyback Ratio - Explained
What is a Buyback Ratio?
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Table of ContentsWhat is a Buyback Ratio?How does a Buyback Ratio Work?Academic Research on Buyback Ratio
What is a Buyback Ratio?
Buyback ratio refers to the money that an organization pays to buy back its own common shares over the previous year divided by the market capitalization at the period when buyback starts. This ratio clearly helps in identifying and comparing the prospective effect of repurchase programs in several companies. Shareholders can also assess the ability of an organization to proffer returns on their investment in shares. Organizations that deal in buybacks constantly have a bigger impact on the market. The outstanding share float of an organization reduces when it buys back its shares, and this ultimately boosts its earnings and cash flow on an average. Also, this gives more time to the management team to decide and offer dividends to its shareholders.
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How does a Buyback Ratio Work?
For instance, company A that has incurred $100 million on its share buyback for a period of last 12 months with a market cap of $2.5 billion at the beginning of this time period will have a buyback ratio of 4%. Company B that incurred $500 million on its buyback, and had a market capitalization of $20 billion at the beginning will have a buyback ratio of 2.5%. Comparing the scenarios of both companies, company A has more buyback ratio as compared to company B, in spite of spending less, and going with a smaller market cap than the latter on its buyback. If investors want to invest in organizations that buyback shares on a regular basis, they can follow indices such as ETFs (exchange traded funds) and S&P 500 Buyback Index. PowerShares Buyback Achievers Portfolio is considered to the biggest ETF in the buyback category. The S&P 500 Buyback Index consists of the best 100 companies in the S&P 500 having the top buyback ratios in the last 1 year. On the other hand, the PowerShares ETF records how U.S. firms have performed over the past 1 year by repurchasing a minimum of 5% of their due or outstanding shares. The S&P 500 Buyback Index outweighs S&P 500 Index in terms of consistency over different time intervals.