Buyback announcements by U.S. companies reached a record level in the second quarter. Almost $437 billion in buyback plans were announced in Q2, trumping the previous quarter’s record of $242 billion, per an article published on Financial Times. Companies have bought back about $670 billion of their shares so far this year.
As many as 63 companies announced share repurchase of at least $1 billion in the second quarter with Apple leading the way with its record $100-billion buyback announcement in May. Financial companies are also making a great impact with 19 firms contributing a total of $112 billion (read: Bet On Record Trillion-Dollar Share Buyback With These ETFs).
What’s Driving the Buybacks?
President Donald Trump’s massive $1.4-trillion tax cut actually enabled companies from almost every sector to boost their dividends as well as share buyback program. The tax plan, passed last December, mainly focused on cutting corporate taxes and adjusting personal tax rates (read: Tax Bill: What ETF Investors Need to Know).
The final tax version cuts the corporate rate from 35% to 21%. The Trump administration also proposed a move from the current worldwide tax system to a territorial system, allowing companies to send their offshore profits back to the United States without extra taxes.So, corporates are finding repurchases as one of the best ways to deploy excess cash and tax savings(read: How Will Tax Reform Affect Buyback and Dividend ETFs?)
Per a 6/26 report by S&P Global, cash as a percentage of debt was at 33% for U.S. corporates, on par with the 2016 level. These companies had a cash balance of $2.1 trillion as of 2017-end. And there are not many ways other than shareholder value maximization or acquisitions to utilize this cash.
While capex growth has been an efficient instrument in using the excess cash, trade war fears will probably spoil the party. The Business Roundtable reported in June that its index of members’ plans for capital expenditure slumped 7.8 points in the second quarter, as quoted on Financial Times.
In fact, Warren Buffett’s Berkshire Hathaway Inc. Class B BRK-B also eased the share repurchase policy recently. Berkshire raised its repurchase threshold to 1.2 times book value from 1.1 times in December 2012. Buffett also noted recently that “both American corporations and private investors are today awash in funds looking to be sensibly deployed" (read: Buffett's Berkshire Buyback Plans Boost These ETFs).
The corporate buybacks have helped the S&P 500 remain in the green this year despite rising rates and trade war worries.
ETFs in Focus
Against this backdrop, investors can keep an eye on the following buyback ETFs.
Invesco Buyback Achievers Portfolio (PKW - Free Report)
The product 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).
SPDR S&P 500 Buyback ETF (SPYB - Free Report)
The fund 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
The fund looks to generate long-term capital appreciation. Stock selection for TTFS is based on stock prices as a function of supply & demand rather than value.
iShares U.S. Dividend and Buyback ETF (DIVB - Free Report)
The underlying Morningstar US Dividend and Buyback Index is composed of U.S. stocks with a history of dividend payments and/or share buybacks.
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