The team over at O’Shaughnessy Asset Management (OSAM) conducted a study of corporate stock buybacks going back to 1987 and the research shows that firms who engage in high conviction buyback programs (high conviction is defined as buyback programs where more than 5% of the shares outstanding for a company is purchased over a 12 month period) have a history of outperforming the broader market over time (registration required to download the report).
History shows that most buybacks executed by companies are low conviction (less than 5% in a given year), but that high conviction share repurchases typically take place when the stocks of the companies present more value (value in this case is defined as a value factor using the combination of price-to-sales, price-to-earnings, free cash flow-to-enterprise value, and EBITDA-to-enterprise value). The small number of firms who engage in high conviction buybacks (about 30% of all buybacks) can get overlooked as they get lumped in with all firms conducting buybacks.
From a performance perspective, the data shows the stocks of high conviction buyback firms have gone on to outperform the broader market substantially and also more consistently. In summary, OSAM writes that “firms with high conviction have tended to buy back shares at much cheaper relative valuations than others. In turn, these high conviction firms have gone on to outperform the broader market by large margins, on average, and have done so consistently since 1987”.