Europe's Buyback Boom Could Power the EUDG ETF

There are nascent signs a share buyback boom is underway in the United States. Europe is also trying to join the party, and that could benefit quality-focused assets like the WisdomTree Europe Quality Dividend Growth Fund (NYSEArca: EUDG).

EUDG tracks the WisdomTree Europe Dividend Growth Index, “a fundamentally weighted index that measures the performance of dividend-paying common stocks with growth characteristics selected from the WisdomTree DEFA Index,” according to WisdomTree.

Some large cap European companies are eager to hit the buyback button, and do so at levels not seen in some time.

“Just as blue chips including LVMH, L’Oreal SA and BP Plc announce large buybacks, Societe Generale SA strategists estimate that European companies will spend 150 billion euros ($180 billion) to purchase their own shares next year. That’s a 25% jump from the average of 120 billion euros in the five years before the pandemic,” reports Lukas Strobl for Bloomberg.

A Buyback Binge?

EUDG’s components are weighed by paid dividends, explaining the fund’s emphasis on return on assets and return on equity. These strategies ensure ample exposure to healthcare, consumer discretionary, and industrial names.

EUDG ETF Holdings

That weighting methodology gives EUDG a quality purview, and could make the fund an ideal avenue for tapping a new European buyback bonanza.

“European companies’ free cash flow is likely to rise faster than dividend allocations during the recovery, creating more room to buy back shares and invest, according to the SocGen strategists, led by Roland Kaloyan,” according to Bloomberg.

The coronavirus pandemic forced European companies, including many EUDG components, to rein in spending and conserve cash. Now, those firms want to deploy that cash. Buybacks are an efficient avenue for doing so.

“Cash held on European balance sheets spiked last year as companies made pre-emptive cost cuts, sought government support and, in the case of banks, were barred from paying dividends. The result was a cash pile so large it offset rising debt issuance, leading to an overall decrease in net debt. That has dialed up the pressure on executives to resume distributions,” concludes Bloomberg.

EUDG All Time Performance

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.