Corporate America is still sitting on huge cash stores that could be deployed to return value back to investors through actions such as share buybacks. Investors who are interested in focusing on these types of companies can consider targeted exchange traded fund strategies.
“While cash levels are off the highs from last year, they are still well above the pandemic levels and remain supportive for buybacks, dividends and M&A, which are all shareholder friendly activities,” Keith Lerner, co-chief investment officer at Truist Advisory Services, told Reuters.
Companies’ plans for their cash reserves could become clearer in the upcoming earnings season, which are expected to show a 6.4% rise in S&P 500 company profits, according to Refinitiv IBES data.
Strategists argued that while cash levels have increased due to many companies remaining cautious during the COVID-19 pandemic, corporate cash flow margins have kept expanding, and these companies can’t just keep twiddling their thumbs.
Since hitting a peak at just over $2 trillion in early 2021, S&P 500 companies’ cash on balance sheets has dropped to around $1.9 trillion, according to Truist data. However, the amount was still well above $1.5 trillion back at the end of 2019 before the coronavirus pandemic.
“Cash levels, whether it’s cash on balance sheets or even the ability of companies to tap capital markets if necessary, remain very robust,” Patrick Palfrey, a senior equity strategist at Credit Suisse, told Reuters.
In a recent report titled “The bull case for stocks,” Credit Suisse strategists argue that they “would expect both buybacks and dividends to increase over the next 12-24 months, a boost to EPS and share prices.”
As more companies look to add value through share repurchases, ETF investors can also capitalize on the potential opportunity through buyback-themed ETF strategies.
For instance, ETF investors who believe in a rise in share repurchases can look to ETFs that specifically target companies that implement buyback schemes, including the Invesco Buyback Achievers ETF (NYSEArca: PKW) and the iShares U.S. Dividend and Buyback ETF (Cboe: DIVB).
PKW includes a broader selection of U.S. companies that have affected a net reduction in shares outstanding by 5% or more in the trailing 12 months. DIVB is comprised of U.S. stocks with a history of dividend payments and/or share buybacks where holdings include those with the largest dividend and buyback programs in the market measured by dollar value.
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