The PowerShares Buyback Achievers Portfolio (NYSEArca: PKW), the largest exchange traded fund devoted to share repurchases and a fund that has history of outperforming the S&P 500, has surged more than 6% over the past month and with buybacks entering a period of seasonal strength, PKW and rival funds could see more upside.
November is the busiest month of the year for buybacks among S&P 500 companies, reports David Wilson for Bloomberg.
About 13% of annual spending occurs during the month of November on average for 2007 and 2009 through 2014, according to Goldman Sachs data.
David Kostin, Goldman Sachs Group Inc.’s chief U.S. equity strategist, argues that the volume of company buybacks in the last few months of the year could be enough to salvage an annual gain for the S&P 500 Index.
Kostin pointed out that the fourth quarter is the year’s busiest three-month period for S&P 500 stock repurchases, making up 30% of buybacks. In contrast, only about 18% of repurchases occur during the first quarter, 25% in the second and 26% in the third.
“Buybacks represent the single largest source of demand for U.S. equities,” Kostin said, adding that he expects companies in the index to spend more than $600 billion this year on their own shares. “The typical year-end surge in buyback activity could help boost the market above our year-end target.”
“Companies have been increasing their buybacks and dividends to please investors for years. Total payouts from S&P 500 companies surged 84% in the past decade to $934 billion in 2014, from $507 billion in 2005, according to a report by S&P Capital IQ,” reports CNN Money.
Stock buybacks helped diminish the number of shares outstanding, which has made the remaining shares that much more valuable. However, a company stock can still dip and repurchased shares can be distributed through employee options as part of their compensation.
When a company engages in repurchasing plans, it is giving up potential growth. Management could have used the money for more practical applications, such as research and development or new products. [Buyback ETFs to Capture Record Company Stock Repurchases]
“Another concern is that buybacks have continued to ratchet up as the value of American stocks — measured by the P/E ratio — remains high and it’s costing companies a bundle,” adds CNN.
PowerShares Buyback Achievers Portfolio
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.