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Apr 06, 2022

Companies timed buybacks well last year, finds study

US firms engaging in record buyback programs

Companies improved the timing of their buybacks in 2021 amid record share repurchases, according to a new study.

The research, conducted by Fortuna Advisors, finds that buyback effectiveness, a bespoke metric that tracks how well companies timed their repurchases, hit +0.7 percent last year – the highest level on record.

Fortuna analyzes buyback programs in two ways. First, it generates a buyback return on investment (ROI) by comparing the cost of the repurchased shares versus the market price. The calculation also takes into account dividends ‘saved’ when shares are taken off the market.

Second, it looks at buyback effectiveness by comparing the buyback ROI against the company’s total shareholder return (TSR). If the buyback ROI outpaces TSR, it indicates the company has timed its repurchases well. 

Fortuna has been tracking buyback programs since 2011 and, during this time, buyback effectiveness has been negative nearly every year, indicating companies are generally not timing their repurchases well, says the firm.

Buyback returns

The report finds that buyback ROI, which is influenced mainly by the share price rising or falling but also by buyback timing, rose last year to its highest level since 2014. The 350 issuers covered in the study saw an average buyback ROI of 15.5 percent in 2021, up from 11.1 percent the previous year.

The top-performing company for its buyback program in the study is Advanced Micro Devices, which last year achieved an ‘eye-watering’ buyback ROI of 136 percent and a buyback effectiveness score of 35.5 percent, says Fortuna.

‘While strong market returns over the past few years have buoyed buyback ROI, we caution that corporate treasurers still need to take a studied approach to buying back shares,’ says Gregory Milano, CEO of Fortuna Advisors, in a statement.

‘This is especially true in the face of current market headwinds, which could make these distributions look worse in time.’

Share buybacks have soared over the last year and are expected to continue climbing in 2022. S&P 500 companies repurchased a record $270.1 bn of shares in the fourth quarter of 2021, up from Q3’s previous record of $234.6 bn, according to data from S&P Global.