Last year, S&P 500 member firms boosted spending on share buybacks by 16.3% to $553.3 billion from $475.6 billion. That was not far off the record set in 2007 when S&P 500 members bought back $589.1 billion of their own shares.
While plenty of large-cap stocks and the corresponding exchange traded funds have benefited from the jump in share repurchases, small-cap ETFs are also getting a lift from increased buybacks courtesy of smaller companies.
Since the end of 2013, small-cap companies that repurchased their own shares outpaced rivals that did not by 2.7%, the Wall Street Journal reports, citing Venu Krishna, a Barclays Capital. Krishna’s analysis was based on stocks in the Russell 2000, the benchmark for ETFs such as the iShares Russell 2000 ETF (NYSEArca: IWM) and the SPDR Russell 2000 ETF (NYSEArca: TWOK). [Small-Cap ETF Differences are big Deals]
The good news for small-cap ETF investors is that companies held by IWM, TWOK and rival funds are picking up the buyback pace this year. “In the first quarter of 2015, small-cap companies’ buybacks rose 3.4% when measured in terms of dollars spent,” according to the Journal.
Important to investors is just how sustainable the trend of rising small-cap buybacks is. The answer to that query is there is plenty of gas left in the small-cap share repurchase tank. Barclays notes that the 11.2% of capital allocated by smaller companies to buybacks is below the pre-financial crisis median level of 12.4%.
Additionally, the buyback yield for small-caps – the dollar amount of repurchased shares divided by the company’s market cap – averages 1.5% compared to 2.7% prior to the crisis, according to Barclays.
Small-cap consumer discretionary and technology firms have been buyback leaders in that cap spectrum, extending a theme that has been seen over the past several years with large-cap share repurchasers. Discretionary and technology are the two largest sector weights in the PowerShares Buyback Achievers Portfolio (NYSEArca: PKW), combining for over 52% of the largest buyback ETF’s sector weight. The SPDR S&P 500 Buyback ETF (NYSEArca: SPYB) devotes 47% of its weight to the those sectors. [Buyback Bonanza Continues]
Rising small-cap buybacks cement the utility of smaller market stocks and the ETFs that hold those equities as legitimate avenues for shareholder rewards.“From the end of 2013 there has been a 10.2% increase in the number of issues paying a dividend in the S&P SmallCap 600,” according to S&P Dow Jones Indices. More than half the members of the S&P SmallCap 600 currently pay dividends. [Small-Cap ETFs Become Dividend Players]
Tom Lydon’s clients own shares of IWM.