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Of late, Democrats have been vocal against the corporate use of cash for stock buybacks. At least five potential Democratic presidential candidates aim to limit how much stock U.S. companies can buy back from shareholders. They intend to bring about a bill that should insist companies to invest more in their employees before buying back its own stock.
The bill will prohibit a company from buybacks “unless it invests in workers and communities first, including things like paying all workers at least $15 an hour, providing seven days of paid sick leave, and offering decent pensions and more reliable health benefits.” Not only this, Florida’s Republican Senator Marco Rubio also joined the chorus, having proposed changes in the capital gains tax, which can dissuade corporates from buying back.
What Backlash? Buybacks are Soaring
U.S. companies repurchased a record $1 trillion in stocks in 2018, and that momentum is showing no signs of easing this year. Buybacks last week were more than $1.4 billion and are now up 58% year over year, per Bank of America Merrill Lynch data. The binge is not only limited to large caps, small-cap companies have also warmed up to this euphoria.
As many as 60 companies in the Russell 3000 announced buybacks worth a total $106 billion in January, almost doubling the 43 announcements totaling $67 billion in buybacks announced in the year-ago month, per Michael Schoonover, chief operating officer at Catalyst Capital Advisors and portfolio manager of the firm’s buyback-focused fund. Cut in corporate tax rates mainly motivated companies in buying back.
We also believe that cheap stock prices, after a 2018 lull, probably incited companies to purse repurchases heavily at the start of 2019.The fourth quarter of 2018 was horrible for Wall Street with the key indexes losing in double digits. A flattening yield curve causing recessionary fears in the United States led to this massacre (read: 4 Worst ETF Areas of Q4).
Overall, buybacks actually instigated the stock market rally this year, not retail investors. Pension funds and retail investors have dumped about $2.4 billion of equities till late February while hedge funds offloaded about $2.7 billion of equities (read: Wall Street’s Best Start Since 1987: Top ETFs of Top Sectors).
Having said this, we would like to note that buyback momentum has slowed during the earnings season as U.S. companies announced $5.8 billion of buybacks per day, down 35% from a year ago, according to TrimTabs Investment Research, as quoted on CNN.
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.
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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