Message Font: Serif | Sans-Serif
No. of Recommendations: 11
Interesting article in today's WSJ

Author: Mark Hulbert


A Surprising Connection Between the Bull Market and Stock Buybacks

Buybacks are more important than economic growth when it comes to equity-market performance, study says

Whatever else you may think about stock buybacks, it’s quite likely that, but for them, the U.S. stock market today would be markedly lower.

That is the implication of a study published last year in the Financial Analysts Journal, “Net Buybacks and the Seven Dwarfs,” by three researchers from the Abu Dhabi Investment Authority. They found that net buybacks—the number of shares that companies repurchased across the entire stock market, less the number of new shares issued—explain the bulk of the intermediate- and longer-term differences in stock-market returns around the world.

This comes as a surprise, because the conventional wisdom is that economic growth is by far the most important factor in the outperformance of certain countries’ stock markets in recent decades. The researchers found little support for this belief."

Have a copy of the FAJ study. The author's main finding:

"In short, the main finding of this study is that the cross-sectional relationship between stock market returns and net buybacks has been significantly positive. Net buybacks have explained 80% of the cross-sectional dispersion of stock market returns of developed and developing markets since 1997, hence dwarfing the seven other building blocks considered in the decomposition of stock market returns: dividend yield, real per capita GDP, price-to-dividend variation, profit margins, payout ratios, relative dynamism of the market index versus the economy, and inflation/currency returns."

Certainly supports Buffett's love of buybacks (under the right circumstances of course).
Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.