MW Why the buyback frenzy may be bad for U.S. stock investors
By Ryan Vlastelica
Companies repurchasing their stock have been underperforming the market
The U.S. stock market is near record levels, and U.S. companies have been spending a record amount repurchasing their own stock. Yet investors should be cautious about connecting the two.
While stock-buyback programs are often touted as a way for a company to improve its share price, this trend hasn't panned out when you look at market data, according to a report by TrimTabs Asset Management.
"Many of the companies that have bought their stock back have underperformed the market," said the report, co-written by Ted Theodore, the chief investment officer of TrimTabs. "And that is not just in the recent six months or so -- for more than the last three years, an index focused on companies with a strong history of buying back their own stock has underperformed."
According to the firm's data, of the 350 companies in the S&P 500 that have repurchased their shares this year, 57% have underperformed the overall market.
Learn more:Why stock pickers should favor companies that invest, rather than reward shareholders (http://www.marketwatch.com/story/why-stock-pickers-should-favor-companies-that-invest-rather-than-reward-shareholders-2018-04-23)
TrimTabs looked at the Nasdaq U.S. Buyback Achievers Index, which consists of companies that have reduced their outstanding shares by at least 5% over the previous year. Since June 2015, this index has returned 26.8% on a total-return basis. The S&P 500, on the other hand, has gained 45.8% over the same period.
The trend has been particularly pronounced in 2018, as measured by the performance of exchange-traded funds that offer buyback-based strategies. While the S&P 500 has gained 9.8% in 2018, the Invesco BuyBack Achievers ETF (PKW) is up just 3.8%. The SPDR S&P 500 Buyback ETF (SPYB) is up 7.5%.
TrimTabs suggested that the performance could be impacted by additional factors, including the debt and balance sheets of the companies in question. Companies that lowered their debt while also reducing their outstanding shares tended to do better than the ones that increased their debt, according to the report.
"The evidence suggests that investors should check the balance sheets of the buyback companies to gain a little additional edge," the report read.
According to S&P Dow Jones Indices, companies in the S&P 500 spent a record $190.6 billion on stock buybacks in the second quarter of 2018. This represented growth of 58.7% from the second quarter of 2017. For the first half of the year, buybacks are up 49.9% to $379.7 billion.
In large part, the surge of buyback activity reflects the tax-cut bill that was passed in late 2017, which gave companies an influx of cash. In August, Goldman Sachs estimated that $1 trillion could be spend on buyback programs in 2018 (http://www.marketwatch.com/story/stock-market-to-get-1-trillion-boost-via-buybacks-says-goldman-2018-08-06).
While the amount spent on buybacks is at records, the activity has been concentrated within a few stocks. Just 10 companies account for 78% of all buyback activity, according to Goldman, while Apple Inc. (AAPL) alone accounts for 24%.
Buyback programs are often seen as a way for companies to improve their profit growth, which are expressed as earnings per share (EPS). Reducing the number of outstanding shares has the same mathematical impact on EPS as increasing revenue.
Read more:Despite buyback frenzy, 'rumors of the demise of capital spending are greatly exaggerated' (http://www.marketwatch.com/story/heres-why-stock-market-investors-reward-buybacks-more-than-capital-spending-2018-09-17)
And don't miss:This hidden factor could soon make stocks much more volatile (http://www.marketwatch.com/story/this-hidden-factor-could-soon-make-stocks-much-more-volatile-2018-09-17)
-Ryan Vlastelica; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
October 01, 2018 11:50 ET (15:50 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.