What value is left in buyback strategy?

One of the factors readily believed to be underpinning the US equity bull run in recent years is the share buyback.

This removal of supply from the market and the replenishing of investors' coffers has made most headlines when undertaken by the big guns: GE's recent announcement of a 3-year spending spree of $90bn stands out among the latest.

The chart below shows how the S&P 500 Buyback index has outperformed the S&P 500 since the start of 2014, up almost an extra 5 per cent, much of it coming in the last several months.

But what about further down the food chain?

Analysts at Barclays note buybacks also have benefited share prices in the small-cap sector. A measure of small-caps with what Barclays terms "high buybacks" has beaten the Russell 2000 over the same period by 3.5 per cent.

Can the strategy continue?

Although Barclays believes small-caps have "aggressively" taken advantage of low interest rates and easier access to credit to fund buybacks . . . "the current level of capital allocated by small-caps to share repurchases (11.2 per cent) is in line with the post-crisis median of 11.3 per cent but lower than the median pre-crisis (2003-07) level of 12.4 per cent".

In other words the current level of buybacks is not extended by historic standards.

Conversely, it says the current large-cap allocation to buybacks of 28.3 per cent is well above the post-crisis median of 25.5 per cent and the pre-crisis median of 27.6 per cent.

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