Companies are ramping up their corporate stock repurchases programs as they convert cash hoards to improve equity values. Investors can tap into this renewed interest in buybacks through targeted exchange traded fund strategies.
Through December 16, companies this month have raised their buybacks by almost two-thirds over the same period last year, the Wall Street Journal reports.
Many originally believed that stock repurchases with wane this year, but the sentiment has made a one-eighty following the Donal Trump presidential victory. After reaching a record high in 2015, buybacks slowed, and many analysts predicted they will decline next year due to soft corporate-earnings growth and stretched stock valuations.
However, with President-elect Trump promising tax cuts and potential changes to help firms repatriate foreign cash hoards under a so-called tax holiday, companies could have access to new cash to be redeployed into stock repurchases.
Goldman Sachs projects S&P 500 companies will repatriate some $200 billion of their $1 trillion cash held overseas in 2017 and $150 billion could be spent on repurchases, which would further help support U.S. equities.
“Buybacks aren’t going anywhere,” Matthew Peron, head of global equity at Northern Trust Asset Management, told the WSJ. “It’s just a question of will they be dialed up through repatriation.”
Stock repurchases help drive up earnings per share and often bolster stock prices. However, critics argue that buybacks artificially support the market during a time of stretched valuations and weak corporate earnings. Others warn that too much money spent on repurchases could reduce U.S. economic growth by pushing off long-term investment spending, especially when companies are re-buying stocks during record highs, which make it an inefficient use of money that could be spent on research or development.
Nevertheless, ETF investors who believe in a rise in share repurchases ahead 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 stock repurchases theme, visit our buybacks category.