Buyback activity has a subdued start to 2017. After falling about 1.6% sequentially in the first quarter, the S&P 500 companies’ stock buyback declined 9.8% in the second quarter to $120.1 billion. The S&P 500 buybacks have in fact plunged 25% since the first quarter of 2016.
The second-quarter buyback was down 5.8% year over year while the first-quarter repurchases fell 17.5% year over year. Superb market rally on Trump-induced optimism is believed to have held companies back from indulging in share repurchase. It means that this monster rally is causing overvaluation in the market, which in turn is limiting corporates’ intention to buy back their own stocks at inflated prices.
SPDR S&P 500 ETF(SPY) is up 11.9% so far this year (as on Sep 20, 2017). Such a stellar run clearly caused “fewer share repurchases and a weaker tailwind for [earnings per share],” as per Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
Beyond Trump, What’s Behind the Slowdown
In May, CNBC pointed out that investors have lately chosen dividends over buybacks. This is a completely different scenario that we noticed in the 8-year-old bull market. In previous years, buybacks overpowered companies and investors’ sentiments than dividends.
The chart displayed below shows this trend:
Source: Standard & Poor’s as quoted on Yardeni Research
Also, the tech sector – the key contributor in the share repurchases – exhibited a significant slowdown in the buyback activity in the second quarter.
Plus, Silverblatt indicated that it is a positive sign. Because “while there is less support for EPS growth, companies are showing an ability to meet their EPS targets without the buyback tailwind, as their Q2 2017 record earnings show.”
Can Buyback Turn Around Ahead?
The Fed is on its way to tighten monetary policies though rate hike and unwinding of its balance sheet. If the economy gains further momentum, and the Fed turns more hawkish, interest rates are expected to rise faster. So, accessing the debt market to finance buybacks would not be an easy task going forward.
However, President Trump’s administration is considering tax overhaul. Treasury Secretary Steven Mnuchin indicated the Trump administration is planning “backdating tax reform to give a boost to the American economy.” Though political uncertainty is rife related to the implementation of such measures, parts of Trump’s policies like the travel ban have lately been put into effect. This is likely to boost investors’ confidence in Trump’s tax cut proposals.
At present, overseas cash can't be brought back to the country without getting hit by a 35% corporate tax rate. Now, overall tax cuts and a one-time repatriation tax could boost share repurchases (read: Buyback ETFs: Trump Beneficiary or Overhyped Bets?).
Now, it remains to be seen whether Trump’s proposed tax plan (if it materializes) benefits ETF activity or if a Trump rally hurts the same (read: Bet on These ETFs on New Hopes for Tax Reform).
ETFs in Focus
Whatever the case, investors can keep a tab on the following buyback ETFs.
PowerShares Buyback Achievers Portfolio (PKW - Free Report) 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 (SPYB - Free Report) measures the performance of the top 100 stocks with the highest buyback ratio in the S&P 500 in the last 12 months.
AdvisorShares Wilshire Buyback ETF (TTFS - Free Report) looks to generate long-term capital appreciation.
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