Why Bigger is Better for Stock Buybacks

UPDATED: April 2022

Why Bigger is Better for Stock Buybacks - Stock Buybacks have traditionally served as a strong indicator for companies that believe their stock is selling at a discounted price. However, with so many stock buybacks to sift through - more than 300 so far this year - where does an investor start? The size of the stock buyback specifically relative to the company's market cap is a good place.

Why Bigger is Better for Stock Buybacks

The case for large stock buybacks comes down to proportion: the bigger, the better. A $1 billion stock buyback for a $100 billion market cap or 1% of outstanding shares isn't nearly as meaningful as a $100 million buyback for a $1 billion market cap company or 10% outstanding shares.

An analysis by EquityCompass Strategies of 10,070 unique buyback announcements from December 1995 to April 2010 shows companies that announced a stock buyback greater than 10% of outstanding shares outperformed the S&P 500 by 3.26% over the next month. Comparatively, companies that announced a stock buyback equated to less than 5% of outstanding shares outperformed the S&P 500 by only 1.77% over the following month.

Regulations and Rules for Buying Back Stock

Companies are governed by rule 10b-18 when it comes to buying back stock, or repurchasing their own shares. Some conditions specify what a company can do, including a repurchase limit of up to 25% of the average daily trading volume. This large trading volume provides companies with the opportunity to influence their share price.

Small Stock Buybacks vs Large Stock Buybacks

Companies with large stock buyback announcements can continue to purchase stock at a high percentage of trading volume for a week or even months, providing a catalyst to actually drive up the price of the stock and potentially squeeze short-sellers along the way. On the other hand, companies that announce only a small stock buyback in terms of percentage shares outstanding have only a limited opportunity to use the trading volume to influence the stock price.

Several companies with recent stock buyback announcements showcase the impact a large buyback can have on the stock's performance. Large stock buybacks, where management has conviction, can be a powerful tool for investors evaluating opportunities in the market. The size of the stock buyback as it compares to the company's outstanding shares is the number to look out for.

Conclusion to Why Bigger is Better for Stock Buybacks

The bottom line for companies considering buying back stock in their own company is that bigger is better. If you are going to repurchase shares, usually buying back the largest amount your company can afford is the best way to benefit from a stock buyback. However, before doing any stock buyback you need to consider whether it makes sense to do the share repurchase at all. There are many reasons why it does not make sense to engage in a stock buyback. So, to find out when it is wise to buyback stock, and when it is not wise, please search our site for other great articles on stock buybacks here, here, and here.


About the Author & How YOU Can Profit: This article is the copyrighted product of the team at BuybackAnalytics.com .

Buyback Analytics is a Top Tier Investing Platform to help investors find, analyze, and profit from investing opportunities not found through traditional investment tools. We specialize in this simple concept:  Follow the trades of Insiders - CONSISTENTLY PROFITABLE Traders, Investors, and Institutions because THEY get Inside Information that YOU don't:

LEGAL Insider Trading / Inside Traders (CEOs, CFOs, Corporation's Accountants & Attorneys, Politicians, etc.)
Stock Buybacks (Share Repurchases) by Public Corporations (ie. Apple, Tesla, Netflix, Meta (Facebook), Microsoft, etc.)
Market Moving Institutions (Examples: Market Makers, Investment Banks, Stock Brokerages, Hedge Funds, etc.)

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