Although share repurchases have slowed this year, exchange traded funds focusing on buybacks, including the PowerShares Buyback Achievers Portfolio (NYSEArca: PKW) and the SPDR S&P 500 Buyback ETF (NYSEArca: SPYB), have been solid performers. For example, PKW, the largest buyback ETF, is higher by 10.4% year-to-date.
The extended low-rate environment in the wake of the financial crisis has encouraged Corporate America to heavily borrow and add value to share prices in the form of stock buybacks. However, the buyback strategy has underperformed as investors looked to yield-generating assets this year.
Buyback ETFs could be in style next year as companies potentially up their levels of share repurchases.
“Buybacks will account for the greatest share of cash use by S&P 500 companies for just the second time in 20 years, analysts wrote in a note. They are expecting companies to spend a total of $2.6 trillion next year, with 52% going to investing for growth, in the form of capital spending, research & development and mergers and acquisitions. The remaining 48% will go to shareholder awards, in the form of share buybacks and dividends,” reports MarketWatch, citing Goldman Sachs research.
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.
“Goldman is expecting companies to increase the amount spent investing for growth by 6% to $1.3 trillion, but will increase cash returned to shareholders by 19% to $1.2 trillion. Spending by companies outside of the energy space is expected to grow by 7%, while spending by energy companies should recover somewhat assuming oil prices continue to stabilize,” according to MarketWatch.
For more information on buyback stocks, visit our buybacks category.
PowerShares Buyback Achievers Portfolio
