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Tech Giants Embrace Stock Buybacks: Its Impact on ETFs
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Share repurchases, or stock buybacks, have become increasingly prevalent in tech companies' earnings this year. According to Cornell University assistant professor Nick Guest, buybacks don't create or destroy a lot of wealth. Instead, they serve as an opportunity for management to signal their belief that the stock is undervalued, as quoted on Yahoo Finance.
Some of the biggest buyback announcements this year came from tech giants such as Alphabet (GOOG, (GOOGL - Free Report) , Apple (AAPL - Free Report) , and Meta Platforms (META - Free Report) , formerly known as Facebook.
Understanding the Criticisms and Data
Critics argue that buybacks can be used to manipulate share prices, contribute to excessive executive compensation, and limit cash available for investment opportunities, thereby sacrificing growth and profitability. However, Guest's research comparing companies that repurchase shares with those that don't has found no significant evidence supporting these criticisms.
Major Tech Buybacks: Google and Apple
Recent buyback announcements from Alphabet and Apple, amounting to $70 billion and $90 billion respectively, have drawn significant attention. While these figures may appear large, they represent only 5.2% of Google's market cap, making them relatively moderate when adjusted for market-wide comparisons.
Why Companies Choose Buybacks
Share repurchases, or buybacks, are when a company uses its cash to buy back some of its outstanding shares from the market. This reduces the number of shares in circulation, which increases the ownership stake of existing shareholders and boosts the earnings per share (EPS) ratio.
Guest suggests that stock buybacks offer more flexibility than dividends, as they can be temporarily cut during downtime and reduce the potential for cash misuse on management's pet projects. Additionally, repurchased shares can be used to compensate employees, offering benefits other than improving long-term profitability or creating additional investment opportunities.
Ideal Conditions for Buybacks
Along with Ali Ragih, a VerityData analyst, we also believe that the best time for buybacks is when the company's valuation is low, as they get the most value for their buyback. For example, if Google spends $15 billion on buybacks, a lower stock price would yield more shares for the same dollar value. Companies with high free cash flow and limited investment opportunities, like Alphabet, are well-positioned for buybacks.
Tech Leads Buybacks Most of the Time
We all know that the tech shares were battered massively last year due to rising rates and their valuations got corrected. This opened up opportunities for them to go for solid buybacks this year. According to a recent report by S&P Dow Jones Indices, tech companies accounted for 28.8% of all buybacks in the third quarter quarter of 2022 versus Q2 2022's 32.8% and Q3 2021's 28.2%.
Which ETFs Can Benefit From Tech Buybacks?
There are several ETFs that track indices that focus on companies with high buyback rates. Here are four examples:
This is one of the most popular and liquid ETFs in the market. For instance, Apple, Microsoft (MSFT), and Alphabet, which are among the top holdings of QQQ.
The NASDAQ US BuyBack Achievers Index comprises of US securities issued by corporations that have effected a net reduction in shares outstanding of 5% or more in the trailing 12 months. The fund charges 61 bps in fees.
Any Caveat?
With increasing backlash against buybacks, shareholders may see fewer of them in the future if disincentives increase or restrictions are imposed. In his State of the Union Address in early 2023, U.S. President Joe Biden will urge Congress to pass a 20% minimum tax on billionaires and increase the new 1% tax on corporate stock buybacks to 4%, the White House said.
This could lead to firms retaining cash or switching to dividends, which may have negative consequences, such as higher taxes on dividends compared to repurchases that generate capital gains.
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Tech Giants Embrace Stock Buybacks: Its Impact on ETFs
Share repurchases, or stock buybacks, have become increasingly prevalent in tech companies' earnings this year. According to Cornell University assistant professor Nick Guest, buybacks don't create or destroy a lot of wealth. Instead, they serve as an opportunity for management to signal their belief that the stock is undervalued, as quoted on Yahoo Finance.
Some of the biggest buyback announcements this year came from tech giants such as Alphabet (GOOG, (GOOGL - Free Report) , Apple (AAPL - Free Report) , and Meta Platforms (META - Free Report) , formerly known as Facebook.
Understanding the Criticisms and Data
Critics argue that buybacks can be used to manipulate share prices, contribute to excessive executive compensation, and limit cash available for investment opportunities, thereby sacrificing growth and profitability. However, Guest's research comparing companies that repurchase shares with those that don't has found no significant evidence supporting these criticisms.
Major Tech Buybacks: Google and Apple
Recent buyback announcements from Alphabet and Apple, amounting to $70 billion and $90 billion respectively, have drawn significant attention. While these figures may appear large, they represent only 5.2% of Google's market cap, making them relatively moderate when adjusted for market-wide comparisons.
Why Companies Choose Buybacks
Share repurchases, or buybacks, are when a company uses its cash to buy back some of its outstanding shares from the market. This reduces the number of shares in circulation, which increases the ownership stake of existing shareholders and boosts the earnings per share (EPS) ratio.
Guest suggests that stock buybacks offer more flexibility than dividends, as they can be temporarily cut during downtime and reduce the potential for cash misuse on management's pet projects. Additionally, repurchased shares can be used to compensate employees, offering benefits other than improving long-term profitability or creating additional investment opportunities.
Ideal Conditions for Buybacks
Along with Ali Ragih, a VerityData analyst, we also believe that the best time for buybacks is when the company's valuation is low, as they get the most value for their buyback. For example, if Google spends $15 billion on buybacks, a lower stock price would yield more shares for the same dollar value. Companies with high free cash flow and limited investment opportunities, like Alphabet, are well-positioned for buybacks.
Tech Leads Buybacks Most of the Time
We all know that the tech shares were battered massively last year due to rising rates and their valuations got corrected. This opened up opportunities for them to go for solid buybacks this year. According to a recent report by S&P Dow Jones Indices, tech companies accounted for 28.8% of all buybacks in the third quarter quarter of 2022 versus Q2 2022's 32.8% and Q3 2021's 28.2%.
Which ETFs Can Benefit From Tech Buybacks?
There are several ETFs that track indices that focus on companies with high buyback rates. Here are four examples:
Invesco QQQ Trust (QQQ - Free Report)
This is one of the most popular and liquid ETFs in the market. For instance, Apple, Microsoft (MSFT), and Alphabet, which are among the top holdings of QQQ.
Vanguard Information Technology ETF (VGT - Free Report)
This ETF also has exposure to some of the biggest buyback achievers in the tech sector, such as Apple, Microsoft and Cisco Systems (CSCO).
Invesco BuyBack Achievers ETF (PKW - Free Report)
The NASDAQ US BuyBack Achievers Index comprises of US securities issued by corporations that have effected a net reduction in shares outstanding of 5% or more in the trailing 12 months. The fund charges 61 bps in fees.
Any Caveat?
With increasing backlash against buybacks, shareholders may see fewer of them in the future if disincentives increase or restrictions are imposed. In his State of the Union Address in early 2023, U.S. President Joe Biden will urge Congress to pass a 20% minimum tax on billionaires and increase the new 1% tax on corporate stock buybacks to 4%, the White House said.
This could lead to firms retaining cash or switching to dividends, which may have negative consequences, such as higher taxes on dividends compared to repurchases that generate capital gains.