There are several reasons a company would want to buy back its shares. Check out why they would, how to calculate it, the results, and the takeaways.

Share Buyback Programs

A company purchasing back its shares tends to increase the stock price for several reasons.

• First, it shows that the firm and its employees are confident in the company’s direction.
• Second, it cuts down on the shares available for investors to purchase, driving the price up through restricting supply.

The Formula

Below, we’ve outlined one of our green flag indicators, “Decreasing Shares Outstanding.”

Like all green flags, we want to keep this simple. We are building a piece of a larger score, not an entire screener.

• Diluted Average Shares must have decreased over the last quarter.
• Diluted Average Shares must have also decreased over the last year.

Incredibly simplistic, but does it work?

The Results

At first glance, it appears we have a pretty good green flag here. It significantly beats the S&P over the past 20 years. That the flag matches more companies is an interesting phenomenon that took off during the Great Recession. Companies tried to exhibit strength in the injured marketplace through a metric they could more easily control. Since then, several high-profile activist investors have been pushing companies to institute share buyback programs to increase confidence and returns.

Past beating the market, we want to ensure that the potential green flag beats the market more often than not. We also want to ensure that the flag has more years with positive returns than negative returns.

Just like with our red flags, a certain percentage of positions must give us a certain return. The difference is that, with green flags, that percentage over 50% of trades net a positive return. We get a bit more than that here, with just under 60% of all trades making money.

Beyond the returns, we also need to make sure that these positions aren’t isolated to any one industry or market cap. It is a bit concerning that over half of the positions taken on are classified as small-cap companies, but these are spread pretty evenly throughout virtually every sector. From what I can see here, this is a pretty solid green flag.

Takeaways

Though these green flags are making more money than they are losing, I wouldn’t use anyone’s green flag as your entire investment strategy. There’s a reason we keep these simple, and that’s to give you, the user, wiggle room to add your parameters and build the perfect investment strategy for your needs.