Companies repurchasing their own shares have become a significant driver in the equities market. As the pace of stock buybacks remains unimpeded, investors can also gain exposure to this growing group through buyback stock exchange traded funds.
Investors who are interested in the buyback theme as a way to bolster shareholder returns have a few options available. For instance, the PowerShares Buyback Achievers Portfolio (NYSEArca: PKW) includes U.S. companies that have effected a net reduction in shares outstanding by 5% or more over the trailing 12 month period. PKW gained 16.8% over the past year. [Buyback ETFs Notch Another Solid Year]
Additionally, the TrimTabs Float Shrink ETF (NYSEArca: TTFS) and the Cambria Shareholder Yield ETF (NYSEArca: SYLD) both include companies that return capital to shareholders through stock repurchases. Over the past year, TTFS increased 18.4% and SYLD rose 13.6%. [A Selective Approach to Buyback ETFs]
Analyst Ed Yardeni of the eponymous Yardeni Research believes that share buybacks will continue to be a key source of stock gains and earnings growth ahead as it makes economic sense, reports Paul Vigna for the Wall Street Journal.
“During the first two to three years of the bull market, bearish strategists contended that stocks were on a ‘sugar high,'” Yardenisaid in a note. “They couldn’t fathom why stock prices were rising when there were no obvious buyers among retail, institutional, and foreign buyers. They obviously missed corporate buyers.”
Between 2009 and 2014, companies implemented $2.1 trillion in buybacks. Over the first three quarters of 2014 alone, corporate buybacks rose 27% to $567.2 billion. For instance, Apple (NasdaqGS: AAPL) spent $17 billion in buying back its own stock. [Apple Finally Enters Buyback ETF]
In contrast, demand for stock mutual funds and ETFs added $85 billion in deposits over 2014, Bloomberg reports.
The pace of company buybacks has not abated. According to Birinyi Associates, buyback authorization of $118.32 billion last month was the strongest for any February on record. Meanwhile, investors pulled over $10 billion out of equity funds in January and February.
Corporate cash hoards are growing but companies are not convinced that there would not be enough consumer demand to justify investment growth. Moreover, with corporate bond yields below forward earnings yield for the S&P 500, more companies see that buying buying back their own stock i the best use of profits.
“Today, Moody’s Seasoned Aaa corporate bond yield is down to an historical low of 3.8%, while the forward earnings yield is at 5.8%,” Yardeni added. “In other words, the Fed’s Stock Valuation Model has been more relevant to corporate finance behavior than investor behavior in the equity market.”
For more information on the equities market, visit our S&P 500 category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own shares of TTFS.
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.