The Inflation Reduction Act contained a controversial though bipartisan provision that applied a 1% levy to companies’ share repurchase activities. However, data indicate that tax isn’t yet hurting stock buybacks.
That could be good news for the Invesco BuyBack Achievers ETF (PKW), an exchange traded fund dedicated to shares of firms that are significantly reducing their shares outstanding tallies. Last year, S&P 500 buyback activity fell 13.8% to $795.2 billion and while naysayers may be inclined to say that the buyback decline was the result of the tax, repurchases surged 18% to $219.1 billion in the fourth quarter from the prior three-month period.
“313 companies reported buybacks of at least $5 million for the quarter, up from 281 in Q3 2023 and down from 318 in Q4 2022; 373 companies did some buybacks for the quarter, up from 362 in Q3 2023 and down from 385 in Q4 2022; 429 companies did some buybacks in 2023, down from 439 in 2022,” according to S&P Dow Jones Indices.
Consumer Cyclical Stocks Support Case for PKW
PKW’s methodology is sector-agnostic. The ETF’s underlying index requires that member firms reduce shares outstanding counts by at least 5% over the trailing 12 months. This means any company can be considered for inclusion if that threshold is met.
As noted by S&P Dow Jones, buybacks by consumer discretionary companies declined on an annual basis in 2023, but that activity ramped up in a big way in the fourth quarter, surging 52.7%. That’s meaningful to PKW investors. Why? Because the ETF allocates 21.23% of its portfolio to consumer cyclical equities – its largest sector exposure.
Likewise, technology share repurchases declined in 2023, but jumped in a big way in the December quarter, rising almost 16%. It remains to be seen. But should that trend continue, it could lead to larger tech weight for PKW. The ETF currently devotes 2.15% to that sector.
There’s another reason tech’s weight in PKW could rise going forward. Some of the big repurchasers in that sector can execute buybacks with free cash, not by issuing debt. That’s a favorable strategy in any environment. Even more so at a time when there are doubts about when the Federal Reserve will finally lower interest rates.
“Given the market’s expectations for interest rates to decline later in the year, even as higher-for-longer interest rates continue, companies may be shy of financing buybacks going forward, as discretionary buybacks, which reduce share count, may need to be financed from ongoing operations,” noted Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices. “Top-tier cash-flow issues however are seen as continuing their buybacks and positively impacting their EPS.”
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