Unexpected Sources Of Share Buybacks -

Unexpected Sources Of Share Buybacks

Oct 09, 2017Jeremy ParkinsonFinance0

A few years ago, WisdomTree coined the phrase “Forgotten Dividend Payers” to refer to mid-cap and small-cap companies that pay dividends. In a yield-starved environment, within the United States one could dip down the market capitalization-size spectrum to find higher dividend yields.

The Share Buyback Phenomenon

Share buybacks have generated a lot of attention within the low-yield environment that we’ve seen since the global financial crisis of 2008–2009. For example, in 2017, we saw Apple commit to a program to return $300 billion to shareholders by March 2019. $210 billion of this would be in the form of a share buyback.1 The reality for U.S. large-cap firms—especially U.S. large-cap technology firms—is that they choose to utilize share buybacks as an important means of returning cash to shareholders.

But what about small caps?

Long-Term Record Indicates Small Caps with Net Buybacks Have Been Strong

(6/30/1963–6/30/2017)

Looking at the boxes, one can’t help but notice that most of the darkest green boxes (highest average annual returns) occurred in the “Net Buybacks” column. This means that firms that were buying back shares tended to outperform firms that were issuing shares. Additionally, the firms on the smaller end of the market capitalization spectrum (higher rows vertically) also tended to do better than the firms on the larger end of the spectrum (lower rows vertically).

One question that people may ask is, how many firms are represented within the smallest quintile that are engaging in share buybacks? Clearly, it wouldn’t be a static number, but to give people a sense, the lowest number of firms in this category was 61 in May and June 1970. For context, in June 2017, there were 290 firms in this category. So we would feel comfortable that the 16.35% per year would represent a diversified array of U.S. small-cap companies.2