Market Overview

There's Still A Case For Buybacks

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There's Still A Case For Buybacks

In case of bipartisanship, politicians from both major parties have criticized stock buybacks this years. Even with that criticism, companies aren't shying away from buying back their own shares and some exchange traded funds dedicated to that strategy are thriving.

What Happened

The SPDR S&P 500 Buyback ETF (NYSE: SPYB) is handling the controversy swirling share repurchase programs with aplomb. That ETF is up 18.63 percent year to date, an advantage of more than 250 basis points over S&P 500-tracking ETFs. SPYB, which debuted over four years ago, follows the S&P 500 Buyback Index.

“The index takes the top 100  companies in the  S&P 500 with the highest buyback ratio in the last 12 months,” according to State Street. “The index screens securities based on the cash value of the actual buyback, not the reduction in number of shares outstanding, in order to more fully capture the shareholder value created by increasing share repurchases.”

Why It's Important

Buyback levels have been soaring in recent years, but are historically more volatile than dividend payments.

“The amount of buybacks jumped significantly right before the 2008 global financial crisis and dropped drastically in 2009,” said S&P Dow Jones in a recent note. “Since 2010, the amount of buybacks has continuously grown and exceeded the amount of dividend distributions.”

Some sectors are home to more dedicated buyers of their own shares than others and SPYB and rival buyback ETFs often reflect sector-level share repurchase trends. Home to 100 stocks, SPYB allocates almost 45 percent of its combined weight to the financial services and technology sectors. Consumer discretionary and industrial names combine for 28.48 percent of SPYB's weight.

On a percentage basis, the increase in share repurchases among S&P 500 member firms over the past 20 years has been staggering.

“The buyback momentum has continued into 2019, even after a record USD 806 billion buyback in 2018, a 56% increase from the previous year,” said S&P Dow Jones. “Two decades ago, fewer than half of S&P 500 companies purchased shares back. The participation rate stood at around 80% as of Dec. 31, 2018.”

What's Next

Past performance is never a guarantee of future returns, but historical data confirm SPYB's underlying index has topped the S&P 500 over the long-term.

“Since its inception in January 1994, the S&P 500 Buyback Index returned 13.29% annually, compared with gains of 10.31% and 8.96% from the S&P 500 High Dividend Index and S&P 500, respectively,” according to S&P Dow Jones.

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