Some investors like to debate the merits of share repurchase programs over dividends, but there are some companies that prefer to put their dry powder and sturdy balance sheets to work by reducing share counts. By reducing shares outstanding, share buybacks help boost per share earnings, a move that has become increasingly popular as management teams look to put free cash to work.
Easy credit has helped many companies maintain strong balance sheets as firms aggressively rebalanced with historic-low interest rates. Additionally, companies are flush with cash because of moderate spending needs, accelerating free cash flow and improving financial flexibility, factors that are leading to increased levels of buybacks. [Why Buyback ETFs Are Outperforming]
That trend is boosting the fortunes of the PowerShares Buyback Achiever Portfolio (NYSEArca: PKW). “While the 0.71% expense ratio of the PowerShares fund is costly for an ETF, the fund has delivered a 10.2% annualized gain over the past five years, trouncing the S&P 500’s 5.4% average gain including dividends. So far this year, the ETF is up 20.2% versus a 15.4% total return for the S&P 500,” reports Jonathan Burton for MarketWatch.
PKW tries to reflect the performance of the NASDAQ Buyback Achievers Index, which is comprised of stocks that have repurchased at least 5% of their total shares outstanding over the past year and is weighted by market cap.
According to Ford Research, the creator of the underlying Buyback index, companies that repurchased over 5% of their stocks in the past 12-months outperformed the S&P 500 Index in 24 of the 28 years between 1975 and 2003. [Buyback ETF Outperforming The Market]
This year is not the first time PKW has beaten the broader market. Over the past three years, PKW’s index has outpaced the S&P 500 and the Russell 3000 Value Index by about 470 basis points each. Over the past five years, the NASDAQ Buyback Achievers Index has offered better than double the returns of the Russell 3000 Value Index, according to PowerShares data.
To be included in the index, “a company must be incorporated in the U.S., trade on a US exchange and must have repurchased at least 5% or more of its outstanding shares for the trailing 12 months,” according to PowerShares.
Investors are taking note of PKW’s ability to outperform the broader market. The ETF has $610.6 million in assets under management, but raked in over $179 million of that total in May alone. That made the ETF the second-best asset gatherer in the PowerShares lineup last month. PowerShares is the fourth-largest U.S. ETF sponsor.
PKW allocates 54.4% of its weight to the consumer discretionary and financial services sectors while technology and health care names combine for another 28.4% of the fund’s weight. Top-10 holdings include Oracle (NadsaqGS: ORCL), American International Group (NYSE: AIG), Travelers (NYSE: TRV) and State Street (NYSE: STT).
PowerShares Buyback Achiever Portfolio
ETF Trends editorial team contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.