Share Buybacks

Sometimes a company buys back its own shares and cancels them, reducing the number of outstanding shares in issue. Buying back shares is an indication the company is positive about prospects or think its shares are undervalue. Share buybacks also increase earnings per share because the number of shares outstanding in reduced (Earnings per share = Net profit after tax / No. of outstanding shares). Ttock performance favors companies that buy back their own shares.

Research has shown that when the proportion of share buyback is high relative to the invested capital of the company, the shares outperformed. Invested capital is defined as book value of common equity plus long-term debt plus preferred stock and minority interest.

Source: Quantitative Strategies for Achieving Alpha by Richard Tortoriello