Stock buybacks are off their 2018 pace when corporate America spent over $800 billion in share repurchases, but they are still high based on historical figures. One estimate, based on where share buybacks have been during the first two-quarters of 2019 point to companies spending roughly $740 billion in 2019 on share repurchase. For comparison, in 2017 companies spent $519 billion, in 2016 there was $536 billion spent, and in 2015 $572 billion was spent rebuying shares.
There are several reasons share buybacks are hitting even lofty levels than in the past. One is the tax cuts that went into effect last year, another being the fact that we are now in the tenth year of a bull market. At this point in a market cycle, there is a combination of company management teams not wanting to make large capital expenditures and not having any large projects they feel are worth spending money on.
Typically, we see large expenditures taking place during the first few years of a bull market, or shortly after a recession has come to an end because this is when new opportunities present themselves to companies for many different reasons. It could be because that is when capital is cheap due to low-interest rates, weaker businesses are struggling from the recession, so the price to purchase them is low, and or there are ‘fire’ sales as the remains companies that failed during the recession are sold off piece by piece.
Regardless of the reasons why corporate America has decided this is the time to buy-back stock, the fact remains record amounts of money are being spent. The benefits of stock buybacks are highly debated, but one thing is for sure, and that’s when companies spend money on stock buybacks, their earnings per share figures usually look better, even if the business itself isn’t growing. This is because when you have fewer pieces of the pie to split, each piece of the pie gets a little bigger. So, even if we are headed towards a recession, buying companies that are purchasing large amounts of their stock will keep their earnings per share figures somewhat healthy in the short run. So, let’s take a look at a few different ETFs that focus on companies who are buying back their stock.
The first is the Invesco BuyBack Achievers ETF (PKW). PKW invests in U.S. based companies that have reduced their share count by 5% or more over the last 12 months. Currently, the fund owns 173 stocks, with the top ten making up 45% of the fund. Year-to-date PKW is up 16.97%, is up an annualized 9.56% over the last three years, and 13.75% over the previous ten years. PKW offers a dividend yield of 1.3% and charges a 0.63% fee. The fund has over $1.1 billion in assets and has been trading since 2006.
Another very similar ETF is the SPDR S&P 500 Buyback ETF (SPYB) which also only buys U.S. based stocks, but limits its holding to 100 companies. While PKW owns anyone that has purchased more than 5% in the previous year, SPYB, owns just the top 100 companies who have the highest buyback ratio who are also part of the S&P 500. SPYB has an expense ratio of just 0.35% but also offers a lower distribution yield than PKW, at just 0.93%. Furthermore, SPYD only has $19 million in assets under management, despite being around since 2015. The fund has performed fairly well year-to-date, as its up 12.74%, and it has an annualized three-year return of 10.41%. But, while PKW will drop companies if their buyback amount falls, SPYD will always hold 100 stocks, which could be a big drawback if we see stock buybacks fall in the future.
We also have the international option with the Invesco International BuyBack Achievers ETF (IPKW). The IPKW does essentially the same thing as the PKW and the SPYB, but it owns international securities from both developed and emerging markets. The IPKW owns companies that have reduced their share count by at least 5% over the past year. Currently, the fund has 56 positions, and its top ten holdings represent 45% of the fund. It has an expense ratio of 0.55% but offers a distribution yield of 2.77%. IPKW has over $147 million in assets under management and has been in operation since 2014. Unfortunately, the funds track record is not great with it being up just 2.9% year-to-date, an annualized 3.45% over the last 3 years and 4.32% over the last five years.
Finally, we have a slightly different take with the iShares U.S. Dividend and Buyback ETF (DIVB), which focuses more on total capital return to shareholders. This one is personally my favorite since it not only owns companies that buyback a lot of their stock but also on firms that pay healthy dividends. By giving shareholders both dividends and buybacks, these companies have their ‘owners’ in mind and need to be in rather strong financial positions in order to be dispersing so much capital. DIVB has an expense ratio of 0.25% and pas a dividend yield of 2.3%. The fund has 372 holdings, which is rather large, but DIVB should be seen as more of an index style fund rather than an actively managed ETF. The biggest downside at this time of DIVB is that it only currently has $8.14 million in assets under management, which means it could be closed soon if that asset base falls much further. Furthermore, DIVB is up 16.12% year-to-date.
Some investors believe share buybacks are a waste of money, while others think it’s the sign of a strong, mature company. But as I have noted before, the different opinions are what makes this thing we call the stock market tick each and every day. Regardless, hopefully this list helps you decide for yourself whether or not you want to invest in these types of ETFs.
Disclosure: This contributor held long positions in Apple, Tesla, Intel, Google, Amazon.com, Facebook, Priceline and Microsoft at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.