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The Supply of Stock Returns: Adding Back Buybacks

32 Pages Posted: 15 Jan 2016  

Philip U. Straehl

Morningstar Investment Management

Roger G. Ibbotson

Yale School of Management; Zebra Capital Management, LLC

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Date Written: December 17, 2015


The shift in corporate payout policy from dividends to buybacks creates the need for a new supply model of stock returns. Our study provides theoretical and empirical evidence for a total payout (dividends plus buybacks) model of stock returns. First, we show that long-run stock returns between 1871 and 2014 can almost entirely be attributed to the supply of total payouts. Second, we provide evidence that total payouts per-share (adjusted for the share decrease from buybacks) grow in line with economic productivity, and that aggregate total payouts grow in line with GDP. Third, we demonstrate that the dividend discount model (DDM), based on current yields and historical growth rates, significantly underestimates forward-looking equity return compared to a total payout model that includes both dividends and buybacks. Fourth, we show that the cyclically-adjusted total yield (CATY) is at least as good of a predictor of changes in expected returns as the cyclically-adjusted price-to-earnings ratio (CAPE).

Keywords: Buybacks, Equity Returns, Return Predictability, Equity Premium

Suggested Citation

Straehl, Philip U. and Ibbotson, Roger G., The Supply of Stock Returns: Adding Back Buybacks (December 17, 2015). Available at SSRN: or

Philip Straehl (Contact Author)

Morningstar Investment Management ( email )

22 W Washington
Chicago, IL 60602
United States

Roger Ibbotson

Yale School of Management ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6021 (Phone)
203-432-6970 (Fax)

Zebra Capital Management, LLC ( email )

612 Wheelers Farms Road
Milford, CT 06461
United States

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