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Solactive, a Frankfurt-based provider of financial market indices, has announced the launch of the Solactive European Buyback Index, an index tracking the share prices of companies which have recently announced stock buybacks (also known as share repurchases).
The index has been designed to act as an underlying for index-linked investment products such as exchange-traded funds (ETFs).
Stock buybacks are the re-acquisition by a company of its own stock. The method is an alternative way for companies to return cash to their shareholders and was first widely used in the US and now increasingly in Europe. Buybacks are Earnings Per Share (EPS) accretive, as the number of shares outstanding is reduced.
The authorization of share repurchases by company officials – who are regarded as having superior insight into the company’s fortunes – is typically interpreted by market participants as a sign that company insiders consider the current share price of their company to be undervalued. Research has found patterns of outperformance in a period of time from two months to two years after a buyback was announced.
The universe for the new index is composed of all stocks which announced a stock buyback in the last two months, in 16 Western European countries. To be eligible for inclusion, stocks must have a minimum market capitalization of €500 million and an average trading value of €2 million over the last three months.
The components are weighted according to their buyback ratio, defined as the sum of all shares bought back in the period divided by the number of shares outstanding at the beginning of the period. It is rebalanced every two months. Major constituents currently include Eurazeo, Ryanair, Novo Nordisk, Remy Cointreau, Koninklijke Ahold, Actelion, Centrica, Tryg, Coloplast and Novozymes.
The index, which has delivered an annualised return of 23.17% with volatility of 17.98% between 28th November 2008 and 17th March 2014, has initially been licensed to the corporate and investment banking division of Societe Generale.
Steffen Scheuble, CEO, Solactive, said: “We are pleased to launch the Solactive European Buyback Index for SG CIB, which will fill a gap in the market, at a time when buyback is becoming an increasing popular concept in the US, as well as in Europe.”
Stéphane Mattatia, Head of Global Equity Flow Engineering in Paris, Societe Generale, added: “A number of academic studies show high return generated by the stocks of companies which buy back their own shares. This appears as a transparent and regular source of performance, exactly the kind of investment our clients are looking for.”