Shareholder friendly. Tax efficient. Value enhancing. Executives describe share buybacks in many ways, usually glowing. But not all buybacks are created equal, according to new research.

When it comes to buying back shares, it pays to think big. Two recent reports — one from Morgan Stanley, the other from Citigroup — find that companies executing the biggest buybacks relative to market capitalisation see their shares rise more than the rest subsequently.

Since 2003, according to Citigroup, the share prices of companies that launched buybacks worth at least 10% of their market capitalisation outperformed the market in the subsequent two months. The bank calls these mega-repurchases “leveraged recaps,” in a nod to the standard tactics of buyout firms.

Morgan Stanley crunched a similar set of numbers. Since 1997, companies that bought back shares saw their share prices rise by 13% a year, lagging a 14% average rise in the broader market. Those in the top quartile of buyback yield, however, experienced a 17% average annual rise, outperforming the market. Companies with the biggest buyback programmes outperformed the market in six of the past seven years.

But perception plays a big part, and there is an important geographical caveat. The share prices of British companies with the highest buyback yields have underperformed the market in the past three years, in contrast to their continental European peers with identical repurchasing characteristics. UK companies are traditionally perceived as “more shareholder focused than their European peers,” Morgan Stanley’s analysts note. So, when continental European firms embark on “what is perceived to be a value creating exercise…the potential upside is more significant.”

That said, the most shareholder-friendly distribution policy of all is more traditional. Over the past ten years, the share prices of companies that consistently boost dividends have outperformed the market — including companies with buyback programmes — regardless of the relative size of the dividend or buyback. “Dividends are rightly perceived to be a much better indicator of management’s long-term view of the health of their company,” the Morgan Stanley analysts point out. Or, put another way, “Buybacks good, dividends better.”

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