Don’t be so fast to welcome a company’s share buyback program

That’s according to a new study that calls into question several of the oft-repeated criticisms of buybacks. One of them is that executives strategically time buybacks to boost their stock price right before selling shares that they own. Though the study doesn’t address executives’ motivations, it finds that if they have such a motivation, they are largely misguided.

Entitled Do Share Repurchases Increase the Value of Non-Repurchasing Firms?, the study was conducted by Byungwook Kim, an assistant professor of finance at the Paul Merage School of Business at the University of California, Irvine. His findings are based on an analysis of the net share repurchases for all publicly traded U.S. stocks for each quarter between 1986 and 2023.

Kim found a statistically significant positive correlation between a given quarter’s total repurchases and the subsequent quarter’s performance of the average company that did not repurchase any of its shares. He didn’t find a similar correlation for those companies that bought back their shares, at least at the 95% confidence level that statisticians often use when assessing whether a correlation is genuine.

“Buybacks are a surprisingly inefficient way to boost a firm’s own stock price, since they mostly help boost the prices of other firms,” Kim said in an interview.

Take Apple, which spent nearly $25 billion on share repurchases in the first quarter—the most of any U.S. company, according to Jeffrey Yale Rubin, president of Birinyi Associates. Its performance so far this quarter is a loss of 9.3% through June 26, versus a gain of 9.8% for the S&P 500’s total return index.

This is just one data point, of course, and no doubt there are many idiosyncratic factors that led to Apple’s market-lagging performance this quarter. But it is consistent with Kim’s finding of a weak to nonexistent correlation between companies’ repurchases in a given quarter and their average return in the subsequent quarter.

Also consistent with Kim’s findings is the performance of the Invesco BuyBack Achievers exchange-traded fund, which invests in the stocks of companies “that have effected a net reduction in shares outstanding of 5% or more in the trailing 12 months,” according to the fund’s website. Since inception in December 2006, the ETF has trailed the S&P 500’s total return by 0.2 annualized percentage point.

Though you may find these results surprising, they make intuitive sense, according to Kim. If you sell your shares to a company engaged in a repurchase program, you are unlikely to turn around and immediately invest in shares of that same company. Instead, you will purchase the shares of other companies.

Kim said shareholders therefore may want to reconsider “welcoming buybacks as enthusiastically as they do, given that they tend to have the effect of helping peer firms.”

Another widespread criticism of buybacks is that companies should instead use the money to invest in future growth opportunities. This new study finds that repurchases may in fact contribute to this goal by transferring capital to younger growth firms with greater growth prospects.

Kim reached this result upon analyzing what investors do with the cash they receive when selling to companies repurchasing their shares. He found that, contrary to the widespread belief that investors simply spend the money they receive through repurchases, “most of the cash distributed through buybacks returns to the stock market.”

Coupled with another of his findings, that non-repurchasing firms “are typically younger, smaller, and have greater growth prospects,” the net result is that repurchases may “lead to a more efficient reallocation of capital.”

Mark Hulbert is a regular contributor to Barron’s. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at [email protected].