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Usually when discussing share buybacks the conversation always lead to whether buybacks are a better way to return capital than paying dividends or vice versa. I wrote an article on this topic last year and found a combination of buybacks and dividends works best. In this article, I will be looking at share buybacks through a different lens, the way I will be looking at buybacks by market capitalization.

My Process

Step 1: Find stocks with buybacks

The first step I had was to find a list of stocks that are buying back shares, so I used the holdings of the PowerShares Buyback Achievers Portfolio ETF (PKW) as my base list of stocks, which PKW has 209 holdings. I choose to use PKW for my list was because of the criteria it uses to select companies out of the universe of companies buying back shares. From the PKW fund page: "To become eligible for inclusion in the Index, a company must be incorporated in the U.S., trade on a US exchange and must have repurchased at least 5% or more of its outstanding shares for the trailing 12 months." That is why I chose to use PKW because it only includes companies buying back at least 5% of shares outstanding, which is a meaningful amount.

Step 2: Screen Stocks by market capitalization

The second step was I copied and pasted the list of holdings into the FinViz.com Screener, and then I selected the market cap criteria of large cap, and copied and pasted those stocks and the one-year returns into a spreadsheet. I repeated this process for mid-cap stocks, small-cap stocks, and micro-cap stocks.

Step 3: Analyze results of screen

The data in the table below shows the number of companies for each market-cap segment as well as the average return for each segment as well as the SPDR S&P 500 Trust ETF (SPY) and PKW for comparison. The data shows both large and mid-cap companies that had buybacks outperformed both PKW and the SPY, with large-cap stocks outperforming the most. What surprised me was how poorly small and micro-cap stocks performed compared to the large and mid-cap stocks, as well as PKW and the SPY.

# Companies

Average Return

Large Cap

43

24.65%

Mid-Cap

73

20.90%

Small-Cap

79

12.04%

Micro-Cap

14

-11.80%

Total Companies

209

PKW

17.14%

SPY

13.04%

Step 4: Add dividends into the mix

For this step, I repeated what I did in step two screening by market-cap but in this step, I added additional criteria, which was the company paid dividends. The data in the table below shows the results of adding dividends to buybacks has little effect on large and mid-cap stocks, but had a significant effect on small and micro-cap stocks. Small-cap stocks with just buybacks went from underperforming both PKW and the SPY to outperforming both when companies paid a dividend. Micro-cap stocks showed the biggest improvement of 16.25% higher return when dividends were included, but was still well below the returns of PKW and the SPY.

# Companies

Average Return

Large Cap

32

24.71%

Mid-Cap

49

20.60%

Small-Cap

30

18.84%

Micro-Cap

4

4.45%

Total Companies

115

PKW

17.14%

SPY

13.04%

Examples

The top 3 performing large-cap companies that buy back shares and pay a dividend, which have provided the best 1-year returns were:

1. Virgin Media Inc. (VMED) +95.22%

2. Time Warner Inc. (TWX) +59.56%

3. News Corporation (NWSA) +58.48%

What is interesting about these 3 companies is that they are all in the same industry dealing with programming, cable and content. This strength in the sector can be attributed to the strong cash flows generated by these businesses, and they have been effective returning that cash to shareholders through large buybacks (>5%). The average yield for these 3 companies is 0.94% so investors are not chasing yield in these stocks, and the returns show the buybacks for this industry have been highly positive on share prices.

Observation/Thoughts

Based on the data I used, it shows that large-cap companies that are buying backs shares provide the best average returns out of all the market cap segments. The data also shows that mid-cap stocks that were buying back stock also provided higher average returns than smaller companies did. One key takeaway I can see from the data is that for small companies paying a dividend in addition to buybacks is the best way to get higher returns than just buying back shares. I hope that if an ETF provider reads this article, they will see that they could make an ETF for companies buying back stock and paying a dividend as well. The ETF name could be the Buyback Income ETF, with the ticker symbol BINC ... just a thought.

Disclaimer

Source: Looking At Share Buybacks Through A Different Lens