As Corporate America sits on stockpiles of cash, companies can either re-invest into their business, pay out dividends or buy back shares. With exchange traded funds, investors can gain exposure to firms that are focused on share buybacks.
The PowerShares Buyback Achievers Portfolio (NYSEARCA:PKW) provides exposure to U.S.-incorporated companies that have repurchased at least 5% or more of their outstanding shares over the past 12 months. The underlying portfolio is rebalanced quarterly in January, April, July and October. PKW is up 14.4% year-to-date.
American companies have purchased $274 billion in more shares than they issued for the year through September, reports Kate Linbaugh for The Wall Street Journal.
Typically, a company buys back its own shares as a way to diminish the number of outstanding shares. Consequently, the company would indirectly raise earnings per share and the market value of the remaining shares.
"Investing in the existing business comes first," Mike Jackson, chief executive of AutoNation Inc., said in the WSJ article. "But you can create a lot of value when you buy stock when there are dislocations in the market."
Additionally, given the current yield environment, it is cheaper to spend money on buybacks because a company can take on more debt at the lower rates instead of paying out dividends.
Moreover, political and economic uncertainty have delayed many firms from expanding their own businesses.
"Organic growth is absolutely the most valued prize," Jim Russell, senior equity strategist at U.S. Bank Wealth Management, said in the WSJ article. "That may not be viable in the slow growth economy with so much uncertainty coming out of Washington."
Ed Yardeni, president of investment advisory firm Yardeni Research, points out that companies are the only net buyers of U.S.-listed stocks this year.
"Who has been buying shares?" Yardeni asked in the article. "It has been corporations buying back their shares directly."
PowerShares Buyback Achievers Portfolio
Max Chen contributed to this article.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.