U.S. corporations’ stock buyback has been solid in recent years. In fact, “heavy spending on share buybacks has helped the stock market hit fresh highs and avoid deeper pullbacks over the past two years,” per an article published on Wall Street Journal. Two decades ago, less than half of the S&P 500 companies bought back their own shares. But the participation rate was around 80% as of Dec 31, 2018.
U.S. companies repurchased a record $1 trillion in stocks in 2018 (as President Donald Trump’s tax reform had aided this corporate action), and that momentum, though a bit slow, was steadyin 2019. S&P 500 share repurchases reached $175.9 billion in the third quarter of 2019, up 6.3% sequentially.
Tailwinds of tax reform are definitely phasing out. Hence, the levels of 2019 buybacks are weaker than the 2018 level, but considerably higher than the pre-2018 levels. “For Q4, the market is looking for another increase in buybacks, in the mid-single digit range, staying near the $190 billion level," per Howard Silverblatt.
About 22.8% of the companies catered to the buyback route in Q3 of 2019 to reduce their share count by at least 4% and boost their EPS. The proportion of the companies was higher than 17.7% noted in Q3 of 2018 (read: Buyback or Dividend: Which ETF Has Won Over Time?).
Against this backdrop, below we highlight the sectors and their related ETFs that have been instrumental in repurchasing their own shares in the recent years.
Maximum share repurchases have been witnessed in the technology sector — worth $1.37 billion in the past 10 years and $871.6 million in the past five years. In the technology sector, Apple (AAP - Free Report) L), Oracle (ORCL - Free Report) , Microsoft (MSFT - Free Report) , Intel INTC, Visa V and Mastercard MA have been driving the activity (read: Play These ETFs on Visa-Plaid Deal).
Apple, in fact, continues to lead to the entire buyback squad, having spent $17.6 billion and taking the spot of the 8th highest payor historically. Though Alphabet (GOOGL) belongs to the communication services sector, many tech ETFs have exposure to Alphabet.The Zacks Rank #1 (Strong Buy) fund iShares U.S. Technology ETF (IYW) puts about 35% weight in Apple, Microsoft, Alphabet and Intel(read: Apple at All-Time High, Poised for an Upbeat Q1: ETFs to Benefit).
The financial sector takes the second spot with about $859.7 million buybacks in the past decade and about $621.3 million worth of repurchases in the past five years (read: Should You Bet on Bank ETFs Before Earnings Release?).
Bank of America (BAC - Free Report) , Wells Fargo (WFC - Free Report) , JPMorgan Chase (JPM - Free Report) , Citigroup (C - Free Report) and Morgan Stanley (MS - Free Report) are the top banks on the S&P 500 Index that are known for hefty buybacks. The Zacks Rank #2 (Buy) fund Financial Select Sector SPDR Fund (XLF - Free Report) has about 31% exposure to BAC, JPM, C and WFC stocks.
Starbucks (SBUX - Free Report) and McDonald's (MCD - Free Report) are the S&P 500 companies that bear the burden of buybacks of the consumer discretionary sector. The sector bought back $742.6 million of shares in the past 10 years and $426.5 million of shares in the past five years. Both stocks — MCD and SBUX — have considerable exposure to the fund Consumer Discretionary Select Sector SPDR Fund (XLY).
The sector has seen buyback of $700 million worth of shares in the past 10 years and $410.5 million shares in the past five years. Johnson & Johnson (JNJ) and DaVita (DVA) are two notable companies for buybacks. JNJ has solid exposure to iShares U.S. Pharmaceuticals ETF (IHE - Free Report) while DVA has managed to grab a sizable share in The Obesity ETF SLIM).
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