After spending $145.2 billion on share repurchases in the third quarter of 2014, S&P 500 members bought back $132.6 billion of their own shares in the fourth quarter, a drop of 8.7%.
“The $132.6 billion Q4 spend represents a 2.5% increase from the $129.4 billion spent during the fourth quarter of 2013. For fiscal year 2014, S&P 500 issues increased their buyback expenditures by 16.3% to $553.3 billion from $475.6 billion posted in 2013,” according to S&P Dow Jones Indices.
The record year for S&P 500 share repurchases was 2007 when members bought back $589.1 billion of their own shares.
Although fourth-quarter repurchases dipped from the third quarter, exchange traded funds emphasizing buybacks and share count reduction have been strong performers in 2015. For example, the PowerShares Buyback Achievers Portfolio (NYSEArca: PKW), the largest buyback ETF, and the actively managed Cambria Shareholder Yield ETF (NYSEArca: SYLD) are both up more than 4% this year compared to a 2.5% gain for the S&P 500. [Buyback Companies on the Rise]
Earlier this year, the NASDAQ US BuyBack Achievers Index, PKW’s underlying index, finally added Apple (NasdaqGS: AAPL), which has been one of the largest repurchasers of its own shares in recent years. Dow component International Business Machines (NYSE: IBM), also joined PKW. [Apple Finally Enters Buyback ETF]
SYLD, which in addition to buybacks emphasizes dividends and a company’s ability to reduce debt, allocates a combined 32% of its weight to the consumer discretionary and technology sectors, two of the largest repurchasers of their own shares. Financial services account for 23% of SYLD’s weight. Following the Federal Reserve’s recent stress tests, several of that sector’s big-name constituents will be able to boost buybacks and dividends. [Bank ETFs to see Bigger Buybacks, Dividends]
“Share count reduction continues to be the market takeaway,” says Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices. “It has significantly increased earnings-per-share (EPS) for 20% of the index issues in each of the past four quarters. While fourth quarter expenditures were down 8.7%, the number of issues reducing their share count by at least 4% year-over-year, and therefore increasing their EPS by at least that amount, continues to be in the 20% area – a significant level.”
The TrimTabs Float Shrink ETF (NYSEArca: TTFS), also actively managed, focuses on companies that have reduced their shares outstanding over the prior 120 days. The ETF’s holdings are selected based on three primary criteria: Shareholder friendliness via float shrinkage, profitability measured by free cash flow and balance sheet sturdiness measured by leverage ratio.
TTFS recently topped $200 million in assets under management and earned its second five-star rating from Morningstar.
The ETF is worthy of those accolades as it is up 5.2% this year and 51% over the past two years. [A Selective Approach to Buyback ETFs]
“Significant changes (generally considered 1% or greater for the quarter) continued to strongly favor reductions, and also increased, as 117 issues reduced their share count by at least 1%, compared to last quarter’s 101 and the 112 which did so in Q4 2013,” according to S&P Dow Jones Indices. “Share reduction change impacts of at least 4% (Q4 2014 over Q4 2013), which can be seen in EPS comparisons, were flat at 99 in Q4 2014 from Q3, but up from the 83 posted in Q4 2013.”
The SPDR S&P 500 Buyback ETF (NYSEArca: SPYB), the newest buyback ETF is also benefiting from still strong buyback trends. SPYB debuted in early February and has outpaced the S&P 500 since then.
The new ETF tracks the S&P 500 Buyback Index, which “provides exposure to the 100 constituent companies in the S&P 500 with the highest buyback ratio in the last 12 months. The buyback ratio is defined as the ratio of the total cash put towards buybacks in the trailing year and the market capitalization of the company as of a reference date,” according to a statement issued by State Street.
Like its rivals, SPYB is heavily allocated to consumer discretionary and technology names with those sectors combining for 43% of the fund’s weight.
PowerShares Buyback Achievers Portfolio
Tom Lydon’s clients own shares of TTFS.