Despite the recent rise in global bond yields, company share repurchases and ETFs that track companies implementing stock buyback schemes could see greater activity ahead.
According to Citigroup strategists, the recent increase in global bond yields is not enough to end a key source of demand for equities throughout this current bull market, reports Luke Kawa for Bloomberg.
“De-equitisation remains a key global investment theme for the next 12-18 months,” Chief Global Equity Strategist Robert Buckland said in a note. “As the cost of equity still remains high relative to the cost of debt it makes sense for companies to de-equitise – use cheap financing to buy back their own shares.”
In the U.S., bond markets have been quick to price in a potential “Trumplfation” in anticipation of tax cuts and infrastructure spending, with yields surging in recent weeks. Consequently, some argued that the higher yields diminishes the attractiveness of debt-fueled share repurchase programs.
Nevertheless, Citi pointed out that the spread between the cost of borrowing fore American and European firms compared to the cost of equity remains appealing for company buybacks. Deutsche Bank AG analysts also argued that rates would have to rise even further, with yields on 10-year investment grade debt rising to 4.5%, before it would be a net negative on S&P 500 companies’ cost of servicing debt.
Moreover, under President-elect Donald Trump’s fiscal plan, which includes a tax break for American multinational firms to bring back overseas cash, large companies may have more money in their coffers after repatriating their cash and more room to expand share repurchasing next year.
Goldman Sachs Group strategists argued that a repatriation tax holiday could bolster buybacks by 30% in 2017, compared to a projected 5% rise without Trump’s backing.
“A significant portion of returning funds will be directed to buybacks based on the pattern of the tax holiday in 2004,” Chief U.S. Equity Strategist David Kostin, said in a note.
ETF investors who believe in a rise in share repurchases can look to ETFs that specifically target companies that implement buyback schemes, including the PowerShares Buyback Achievers Portfolio (NYSEArca: PKW) and the SPDR S&P 500 Buyback ETF (NYSEArca: SPYB). PKW includes a broader selection of U.S. companies that have effected a net reduction in shares outstanding by 5% or more in the trailing 12 months. SPYB, on the other hand, focuses on S&P 500 companies with the highest buyback ratio in the past 12 months.
Foreign markets are also experiencing record low or negative interest rates. Consequently, investors who believe other markets will follow the lead of the U.S. and engage in massive share repurchases could be good news for the PowerShares International BuyBack Achievers Portfolio (NYSEArca: IPKW), the international equivalent of the wildly popular PKW.
For more information on the buybacks strategy, visit our buybacks category.