Share buybacks are another way for corporations to return cash to shareholders.
As rates dropped from the U.S.’ QE program, corporations used cash flow and debt to repurchase shares, driving up earnings-per-share by shrinking the denominator rather than growing earnings. International firms now have the same opportunity, including those in countries such as Italy and Spain, where rates have dropped sharply and valuations are cheap.
QE programs should also be viewed in the larger context of economic reform.
For instance, in Japan, Abenomics relies on three arrows: monetary stimulus, fiscal stimulus, and reform, according to various media reports. Meanwhile, some look for reform to come from changes to government labor laws. Another important source of reform can be corporate reform. International developed countries sport price-to-book ratios well below those in the U.S.
The main reason for those lower international price-to-book ratios is U.S. corporations are more effective at turning assets into profits. Fiscal discipline inside companies should mean a greater focus on returning money to shareholders rather than engaging in corporate projects designed to maintain the size of the organization.
IPKW provides an opportunity for U.S. investors to purchase a group of companies that has shrunk its share count by at least 5 percent in the previous fiscal year.
Working off the hypothesis that international markets are traveling a similar path to the U.S., the performance of the domestic-focused PowerShares BuyBack Achievers Portfolio (PKW | B-99) should prove heartwarming. PKW returned more than 18 percent annualized over the last five years, relative to the Russell 3000 Index gaining slightly more than 14 percent.
EFV is a large fund with nearly $3 billion in assets, and it averages more than 50,000 shares traded each day, according to iShares. IPKW’s asset base is much smaller than EFV; it only has $25 million, and is more concentrated than EFV. The buyback strategy has proven popular in the domestic market. PKW now has more than $3 billion in assets. Three years ago, PKW had only $133 million.
CLS uses factors to emphasize stocks of a particular type, while remaining diversified. EFV and IPKW are worth a look, as ETFs keep investors diversified while giving portfolios a better chance to add value.
At the time this article was written, the author’s firm owned shares of EFV in client portfolios. CLS Investments is an Omaha, Nebraska.-based third-party investment manager and ETF strategist. CLS began to emphasize ETFs in individual investor portfolios in 2002, and is now one of the largest active money managers using exchange-traded funds, with more than $2 billion invested. Contact CLS' Chief Investment Strategist Scott Kubie at 402-896-7406 or at [email protected]. Please click here for a complete list of relevant disclosures and definitions.