Forecasting Stock Returns with Buyback and Dividend Expectations

Publicly traded firms routinely reward shareholders by cash payouts. The best-known form of payout is a cash dividend per share. The SEC Rule 10b-18 in 1982 provided U.S. companies a legal safe harbor to conduct share buybacks without suspicion of price manipulation, and effectively created an alternative form of payout to dividends whereby the firm pays investors by repurchasing its shares. Grullon and Michealy (2002) observe that “just one year after the approval of Rule 10b-18, the aggregate amount of cash spent on share repurchase programs tripled”. Both Grullon and Michaely (2002) and Fama and French (2001) conclude almost 20 years ago that share buybacks are rapidly becoming the preferred method of payout for many firms. While dividend-focused investment research has been fairly popular across the financial industry for a long time, quantitative researchers tend to ignore the impact of buyback programs on stock returns.

This paper features a novel dataset that captures both the buyback and dividends expectations. Visible Alpha creates a unique dataset by aggregating sell-side analyst expectations on entire financial statements and revenue drivers for as many periods into the future that analysts provide for their buyside clients. The forecasted cash flow statements capture a time series of analyst consensus on payment of dividends, change in equity through gross and net buybacks for the next four quarters, and more. Therefore, this paper is the first analysis of forward-looking total payout expectations in an area where researchers historically only had backward-looking measures of total payouts.

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