On this page is a buyback yield calculator. Enter the number of shares outstanding currently and twelve months ago to compute the company's buyback yield (or the effect of dilution).
Buyback Yield Calculator
What is the buyback yield?
The buyback yield is the implied yield computed by a company's efforts in shrinking the number of shares outstanding. While dividend yield is more visible, when a company buys back stock it leaves all remaining shareholders better off since they now have a greater percentage ownership of a company.
Both the buyback yield and the dividend yield together make up the shareholder yield.
Buyback Yield Formula
The dividend yield formula is:
buyback\ yield=\frac{shares\ outstanding\ before-shares\ outstanding\ now}{shares\ outstanding\ before}Where:
- Shares outstanding now - the total number of shares of a company now
- Shares outstanding before - the total number of shares of a company 12 months ago
- Dividend - the annual amount of dividends paid per share by a security.
- Asset Price - price to purchase the security.
Issues with Buyback Yield
While buybacks – save those that cause liquidity crunches – are great to see from a shareholder perspective, there are many reasons they could be a sub-optimal use of cash. Other than the rare case a buyback eliminates a company's needed liquidity, buybacks fall short when:
- They are a suboptimal use of funds
- They are used to cover up dilution
- They are used to juice other ratios
(There also isn't as much pressure on companies to continue buybacks as there is to pay dividends – regular dividend payers tend to attract a particular crowd of investors, with no comparable audience for firms that buy back.)
Let's look at the three issues with buybacks.
Sub-optimal use of funds
A company has only four ways to use earnings – buy back shares, pay dividends, reinvest, or purchase other companies (and yes, technically, they can also retain earnings to use later). So any time a company chooses to pursue one at the expense of others, it was a sub-optimal capital allocation.
While mergers and acquisitions gone wrong attract more attention, many companies buy back stock that later trades in the market for substantially lower prices.
Covering up dilution
Many companies issue their employees equity of some form as a part of compensation. While companies declare options and equity pools in advance, continuing grants mean the company needs to allocate more and more future shares to compensation.
Some companies will announce flashy buyback plans simultaneous with employee equity vests, but don't purchase offsetting vesting equity. As some investors treat stock-based compensation as a non-cash expense, it's crucial to net out any extra dilution before crediting a company with buyback yield (looking at snapshots of share count will do this.) And, certainly, once you pair a buyback with stock-based compensation, you're now monetizing SBC.
A similar issue applies to stock acquisitions and secondary offerings of shares, preferred shares, convertibles, and the like – always look at the share snapshot and consider what the company is getting for its dilution. Talent and new acquisitions can be worth it, but they aren't free.
Improve valuation metrics
Valuation measures look better with fewer shares outstanding, especially any common ratios that use a per-share price. While that's an unavoidable consequence – or bonus – of any buyback, it's important to note that the growth in earnings, sales, gross profit, or so on per share is just math and not necessarily a change in the company's prospects. As with the sub-optimal use of funds section, those earnings now can't be used to reinvest in other areas of growth.
Again, it's not necessarily bad if you understand the mechanism behind the improvement in valuation. Famously, Autozone was able to buy back shares at a good price and grow their share price substantially faster than their business metrics would support (although it needs to be said, the business metrics were also excellent.)
