Investment Performance, Importance of Cash Levels, and Descriptive Company Statistics for U.S. Buybacks

Abstract

An investment strategy based on buying U.S. stocks announcing share repurchase programmes over the period 1999 to 2014 suggest a minor long-run positive drift, with differing significance levels dependent on the test model. In descriptive terms, buyback activity is pro-cyclical and buyback companies are overrepresented among large-cap stocks that are less CapEx intensive and hold higher levels of cash on their announcement date. In contrast to the notion that insiders buy back stock based on market undervaluation, I contend the majority of buybacks are a flexible and innocuous means of deploying excess cash. Although buybacks can be interpreted as conservative, they express insider confidence in share prices and outlook on cash flows. However, I advise the investor to avoid exceptionally cash-rich stocks. These firms are more likely to choose buybacks simply to act on a build-up in cash, a rather mundane capital allocation decision considering its alternative use.