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Buybacks Are Falling, But The Buyback ETF Is Rising

December 11, 2017 4:01 pm
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Buybacks Are Falling, But The Buyback ETF Is Rising

Share buybacks among S&P 500 member firms are declining. In the second quarter, S&P 500 companies repurchased $120.1 billion of their own shares, an almost 10-percent decline from the first quarter. Second-quarter repurchase activity was almost 6 percent lower on a year-over-year basis and 25.6 percent below the activity seen in the first quarter of 2016.

“For the 12-month period ending June 2017, S&P 500 issues spent $500.8 billion on buybacks, down 14.5 percent from the $585.4 billion set during the 12-month period ending June 2016,” according to S&P Dow Jones Indices.

Declining buyback activity is not derailing the PowerShares BuyBack Achievers Portfolio (NASDAQ:PKW). PKW, the largest exchange traded fund  dedicated to a buyback strategy, is up nearly 16 percent year-to-date after hitting a record high Friday.

Buyback Decline Could Continue

In advance of the GOP's tax reform package potentially being signed into law, some market observers argued the repatriation of trillions of dollars stored offshore by U.S. companies could result in increased dividends and renewed share buyback activity. After all, technology companies have massive stockpiles of cash offshore, and the sector has been a prolific buyer of its own shares in recent years. Technology is PKW's fourth-largest sector allocation at 13.1 percent.

Financial services, PKW's largest sector allocation at over 25 percent, are boosting share repurchases, but investors should not expect to see the same trend across all sectors. Four of PKW's top 10 holdings hail from the financial services sector.

Some market observers argue that tax reform will not spur increased buybacks because the S&P 500 is richly valued and, with the U.S. economy strong, companies are looking for other avenues to deploy cash.

Another Reason Buybacks Could Continue Faltering

With the U.S. bull market aging by the day and share prices at or near record levels for many S&P 500 firms, repurchase programs may no longer be economical. By some estimates, a company must reduce outstanding shares by 3 or 4 percent for a buyback effort to be truly meaningful. To be included in PKW, companies need to reduce shares outstanding by at least 5 percent over the trailing 12 months.

Investors have pulled $217.2 million from PKW this year.

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