The PowerShares Buyback Achievers Portfolio (PKW) is a big name among ETFs focusing on companies with impressive track records of repurchasing their own stock.
However, there are other advantages with this ETF that are visible upon further examination.
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.
“A reduction in shares outstanding spreads profits over a smaller base, which tends to increase a company’s earnings per share — an important measure of profitability,” said PowerShares in a recent note. “Assuming a constant valuation multiple and no change in earnings, rising earnings per share can support equity prices, as stock prices tend to move in the direction of earnings and profits over time.”
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.
Related: The Buyback ETF Theme Could Gain Momentum
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 as an investment strategy lagged in 2014 and 2015. I believe this was primarily because of market conditions. The NASDAQ US Buyback Achievers Index tilts toward the value and small-size factors because buyback is a form of value investing, while the companies meeting the buyback threshold of 5% tend to be less concentrated in size than a market-cap-based index like the S&P 500 Index,” according to PowerShares.
PKW devotes half its combined weight to industrial and financial services stocks.
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 (NASDAQ: IPKW), the international equivalent of the wildly popular PKW.
For more information on the stock repurchases theme, visit our buybacks category.