New data from S&P Dow Jones Indices showed that share buybacks hit a record $800 million in 2018, which could fuel exchange-traded funds that focus on buybacks, such as the iShares US Dividend and Buyback ETF (BATS: DIVB).
DIVB seeks to track the investment results of the Morningstar® US Dividend and Buyback IndexSM. The underlying index is designed to provide exposure to U.S.-based companies that return capital to shareholders through either dividend payments or share buybacks.
DIVB is ideal for investors looking to add income and growth potential to their portfolios since dividends and stock buybacks have been proven drivers of long-term returns. DIVB is up 12.25 percent year-to-date and saw record annual distributions in 2018.
Key holdings in DIVB as of March 25 include Apple, Microsoft, JP Morgan, and Cisco Systems.
The data from S&P Dow Jones Indices showed that buybacks were up 55 percent from year earlier and 36 percent more than a previous high back in 2007.
“Buybacks were again favored over dividends in both the rate of growth and aggregate dollars spent,” said S&P Dow Jones Indices analysts Howard Silverblatt. “Companies continued to spend more of their tax savings on these share repurchases as they boosted earnings through significantly reduced share counts.”
“Adding to the share reduction, and therefore the EPS impact, was Q4’s stock price decline, which permitted companies to buy even more shares for their dollars and reduce share count more efficiently,” Silverblatt added.
Detractors of share buybacks say that the capital used could go to more job creation and innovation. In conjunction with Senate Democratic leader Charles Schumer of New York, Sanders recently proposed legislation that would effectively place preconditions on a company’s ability to repurchase shares of its own stock.
“Our legislation would set minimum requirements for corporate investment in workers and the long-term strength of the company as a precondition for a corporation entering into a share buyback plan. The goal is to curtail the overreliance on buybacks while also incentivizing the productive investment of corporate capital,” Schumer and Sanders wrote.
According to an article in CNBC, “more than $1 trillion in buybacks were announced by large companies after a corporate tax cut pushed through Washington in late 2017 left companies with a lot of extra cash to spend. But instead of significantly raising worker pay or investing in equipment, companies mostly used the cash to buy their stock. And some large companies are buying back billions of dollars of shares while announcing layoffs and factory and store closings, the senators wrote.”
The legislation came about as companies like Walmart and Harley Davidson have caught heat for laying off hundreds of workers in order to free up capital to repurchase their own stock.
“At a time of huge income and wealth inequality, Americans should be outraged that these profitable corporations are laying off workers while spending billions of dollars to boost their stock’s value to further enrich the wealthy few,” the senators said.
To challenge this view, former Goldman Sachs CEO Lloyd Blankfein tweeted that “the money doesn’t vanish It gets reinvested in higher growth businesses that boost the economy and jobs. Is that bad?”
A company used to be encouraged to return money to shareholders when it couldn’t reinvest in itself for a good return. The money doesn’t vanish, it gets reinvested in higher growth businesses that boost the economy and jobs. Is that bad? https://t.co/sxfcmve0DA
— Lloyd Blankfein (@lloydblankfein) February 5, 2019
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