Buyback ETFs Could Benefit as Share Repurchases Top $1T

Corporate buybacks may surpass $1 trillion for the first time, according to S&P Global.

sumit
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Senior ETF Analyst
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Reviewed by: Sumit Roy
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Edited by: Sumit Roy

Corporate buybacks are at record levels and companies engaged in the most buying are outperforming. 

Data from S&P Global shows companies in the S&P 500 purchased $930 billion of their own shares in 2022, a record amount. Howard Silverblatt, senior index analyst at the firm, told CNBC that buybacks could reach more than $1 trillion this year.  

The increase in buybacks comes despite the fact that corporate earnings are expected to decline for a second straight quarter in Q1. 

Some say buybacks signal confidence on the part of companies about the prospects for their businesses and the economy in general. Others say just the opposite—that they indicate a lack of opportunity on the part of companies to invest and grow their core businesses. 

Buyback ETFs Outperform  

In either case, buybacks should have a positive effect on stock prices, all else equal. Like anything else, prices for stocks are set by supply and demand. As demand rises from corporations buying their own stocks, that should give a lift to prices―at least in theory. 

At the same time, buybacks reduce the number of shares outstanding in a company, giving remaining shareholders a larger stake in the firm. All else equal, metrics like earnings per share and cash flow per share rise as companies execute buybacks.  

It’s a concept that Warren Buffet emphasized in the latest annual letter for Berkshire Hathaway investors: 

“The math isn’t complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices. Gains from value-accretive repurchases, it should be emphasized, benefit all owners – in every respect,” he wrote.  

However, Buffet cautioned that not all buybacks are good for shareholders:  
“When a company overpays for repurchases, the continuing shareholders lose. At such times, gains flow only to the selling shareholders and to the friendly, but expensive, investment banker who recommended the foolish purchases.” 

His view is that the price paid for shares repurchased by a company is a crucial factor in the buyback calculus, and not one that is always heeded by corporate executes who sometimes buy shares at inflated prices. 

Still, the general idea that buybacks are good for shareholders seems to match up with reality.  

Over the past year, the PowerShares Buyback Achievers ETF (PKW)―which tracks a market-cap-weighted basket of firms that repurchased at least 5% of their outstanding shares in the past year―is up 0.8% compared with a 6.5% loss for the broader MSCI USA IMI Index that it pulls its stocks from.  

For comparison, the S&P 500 is down by 6.4% in the same period.  

 

 

Significant Outperformance Longer Term 

The recent outperformance in the buyback ETFs is notable, but like any short-term performance data, it could just be noise.  

That said, longer-term data paints a similar picture, suggesting the buyback strategy has merit. Since inception in December 2006, PKW has handily outperformed the MSCI USA IMI Index and the S&P 500, with a gain of 319% compared with 274% and 286%, respectively. 

 

 

While past performance is no guarantee of future results, these figures support the idea that companies that buy back a lot of shares tend to outperform. If that is the case, this year’s potential record level of buybacks should be looked upon in a positive light. 

 

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Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.