Buyback activity has been subdued this year having dropped to a nine-quarter low of $115 billion in the third quarter. It would have been even lower barring Microsoft’s $40 billion buyback.
Announced buybacks are 30% lower for the first 10 months of this year compared to last year, according to TrimTabs. Actual buybacks in Q2 were down 6.8% compared with the year-ago period, representing the “smallest quarterly buyback total since the third quarter of 2013.”
And in Q3, actual buybacks of half the companies fell 6% sequentially and 26% from the year-ago period. Dwindling cash piles with corporates and higher stock valuation can be held responsible for such corporate behavior. S&P Dow Jones Indices also noted that “many companies likely overspent in the early part of the year as prices dropped, and there is less room for additional purchases (read: 3 Reasons Why Buyback ETFs May Lose Momentum).”
Can it Surge in 2017?
Against such a gloomy backdrop, Goldman Sachs indicated that the S&P 500 companies will likely again boost repurchases in 2017 as the presidential-elect Trump pushes companies to bring foreign cash back home. During his campaign, Trump indicated that he will provide a repatriation holiday of 10%. If such a move materializes, companies of the home country will not feel uncomfortable in repatriating back their income earned from and laid in the foreign country.
As per an analyst, “there is approximately $1.2 trillion held overseas that can't be brought back to the U.S. without getting hit with the 35 percent corporate tax rate.” So, lower tax rates and repatriation of cash could boost share repurchases by companies. Goldman Sachs pointed to the historic pattern which says “a tax repatriation holiday enacted in 2004 caused buyback executions to spike 84% that year and 58% the following year (read: Prepare for a Trump Presidency With These Stocks & ETFs)."
Goldman’s prediction is a 30% surge in buybacks to $780 billion with $150 billion of it originating from repatriation of cash. The prediction is huge, marking the highest deployment of S&P 500 cash for the buyback purpose for “only the second time in the last two decades.”
Wells Fargo Investment Institute also sees increased cash usage in the form of buybacks and dividends. Investors should note that the earnings recession finally came to a halt in Q3 after five long quarters, displaying a brighter picture of corporate health, which in turn may boost share repurchase activity.
Any Threat to This Proposition?
First, we are yet to see how effectively Trump delivers on his vows. Also, some concerns still linger. If the market continues to rally on Trumpnomics in 2017 as it is doing now, then companies may restrict themselves from buying back their own shares at an inflated price.
Investors should also note that the S&P 500 has hit all-time highs several times this year and a loose fiscal policy (if at all materializes) may spur a stock rally next year too.
Secondly, already, U.S. Treasury yields are rising on the Fed hike prospect. So, accessing the debt market to finance buybacks would not be an easy task next year (read: Prepare for Rising Rates with These Inverse & Hedged Bond ETFs).
ETFs in Focus
Whatever the case, investors can keep a tab on the following buyback ETFs.
PowerShares Buyback Achievers Portfolio PKW looks to track companies that have implemented a net reduction of 5% or more in shares outstanding in the last 12 months (see Total Market (U.S.) ETFs here).
Another buyback ETF SPDR S&P 500 Buyback ETF measures the performance of the top 100 stocks with the highest buyback ratios in the S&P 500 in the last 12 months.
AdvisorShares Wilshire Buyback ETF TTFS looks to generate long-term capital appreciation.
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