Investors often look at share repurchases as signs of management confidence, but a new study shows that may not hold for retailers. Citigroup analysts looked at buybacks for the 50 retail and apparel companies they cover since 2011. It focused on instances of companies repurchasing 5 percent or more of their outstanding shares within a year.
Out of 71 such instances, on average, the stocks underperformed the S&P Retail Index by more than 10 percentage points in the year following the repurchase, Citigroup found. The companies’ stocks underperformed the index in the year following the repurchases in 44 of 71 instances, outperforming only 27 times.
Why does that happen? One hypothesis suggests that retailers may be buying back stock not because the stock is valuable, but to cushion earnings per share the following year.