With valuations on U.S. stocks high in the eyes of some market observers, the previously positive impact of share buyback programs is being muted, triggering some rare under-performance by companies that have been voracious buyers of their own shares.
“Firms with larger buybacks outperformed the market for several quarters, but that streak is in jeopardy, as the S&P 500 Buyback Index is down 0.2 percent for the quarter,” report Caroline Valetkevitch and Chuck Mikolajczak for Reuters.
The PowerShares Buyback Achievers Portfolio (NYSEArca: PKW) is down about 1% this quarter compared to a 0.7% gain for the S&P 500. PKW tracks the NASDAQ US Buyback Achievers Index, not the aforementioned S&P Buyback Index.
Some of PKW’s second-quarter struggles can be tied to its large consumer discretionary of almost 34%. Although discretionary firms have been among the largest repurchasers of their own shares in recent years, the sector has struggled this year with the Consumer Discretionary Select Sector (NYSEArca: XLY) and the Vanguard Consumer Discretionary ETF (NYSEArca: VCR) down an average of 3%.[Returning Retail ETFs]
“S&P 500 companies that initiated buybacks in the first three months of 2014 underperformed the benchmark index by 0.25 percent in the month after announcing, while a similar group outperformed the index by 1.29 percent in the same period a year ago,” Reuters reported, citing Birinyi Associates.
One quarter, one that is barely half complete at that, of under-performance is not a reason to write-off PKW. The ETF’s long-term track record and that of its underlying index confirm as much.
“The NASDAQ US Buyback Achievers TR Index (DRB) has significantly outperformed the S&P 500 TR Index over the last 12 months, with returns of 27.24% vs. 20.44%, respectively. In addition, the NASDAQ US Buyback Achievers Index has also outperformed the S&P 500 in the last 24, 36, 60, and 120 month periods with comparable risk and over the last 10 years, the Index has a total return of 227.62% vs. 109.32% for the S&P 500 Index,” according to NASDAQ OMX Global Indexes, which references data as of April 30.
PKW is up 2% this year, meaning it has outperformed six of its top-10 holdings, a group that combines for about 36% of its weight. In fairness to the ETF, two of those top-10 holdings, DirecTV(NasdaqGS: DTV) and Time Warner Cable (NYSE: TWC), have been acquisition targets. [ETFs for the DirecTV Takeover]
Over the past five years, the S&P 500 members that have been the largest repurchasers of their own shares are Dow components IBM (NYSE: IBM) and Exxon Mobil (NYSE: XOM), which are 75% and 47%, respectively, over that time. PKW is higher by 157% over that time.
PowerShares Buyback Achievers Portfolio
