Portfolios Weighted by Repurchase and Total Payout

Abstract

This paper examines three portfolios weighted by fundamental measures of firm size: share repurchases, total payout, and earnings retention. We find that the repurchase weighted and the total payout weighted portfolios have higher excess returns and higher Sharpe ratios than the most common fundamental weighted portfolio (namely, the dividend weighted portfolio). The repurchase weighted portfolio shows a positive and statistically significant alpha of 2.77% after controlling for the Fama-French factors (of market, size, book-to-market), and Carhart's momentum variable. The total payout weighted portfolio also has a positive and significant alpha, albeit smaller than that of the repurchase weighted portfolio.

Keywords: Fundamental measures, firm size, share repurchases, total payout, earnings retention