Buybacks Vs. Dividends: PowerShares BuyBack Achievers Portfolio Comes Out On Top

Aug.20.14 | About: PowerShares Buyback (PKW)

Summary

Companies return value to shareholders through dividends and share buyback programs.

In 2013, S&P 500 companies returned $330 billion through dividends and $477 billion through buybacks.

Investors shouldn't ignore the value that is created over the long-term through buybacks.

Investors tend to have a negative view on share buybacks and believe shareholders are better rewarded by returning excess funds through dividends as opposed to buybacks. The thinking is pretty straight forward. A dollar is better off in the investor's pocket than used to reduce the count of outstanding shares. This article will compare the SPDR S&P 500 Dividend ETF (NYSEARCA:SDY) and PowerShares BuyBack Achievers Portfolio ETF (NYSEARCA:PKW). The SPDR S&P 500 Dividend ETF is designed to track the performance of the S&P High Yield Dividend Aristocrats Index. The index is designed to measure the performance of the highest dividend yielding S&P Composite 1500 Index companies that have increased dividends every year for at least 20 consecutive years. The PowerShares BuyBack Achievers fund invests in companies that have a net reduction in shares outstanding of 5% or more in the past 12 months. These 2 funds are one of the best ways to track historic returns of dividend aristocrats versus companies that have made share buybacks a priority.

Buybacks vs. Dividends

Click to enlarge

Source: FactSet Dividend Quarterly 1Q14

During 1Q '14, $249.1 billion was returned to shareholders through dividends and share buybacks. Prior to this record, the highest amount distributed was $242.1 billion in 3Q '07. Of this $249.1 billion, buybacks account for $154.5 billion and dividends account for $94.6 billion. While dividends have increased for 13 consecutive quarters by double digits, companies clearly prefer to use excess cash for share buyback programs. Looking back over the past 10 years, it's clear that this trend is fairly common with dividends only surpassing buybacks at the end of the US recession in late 2008 and early 2009.

Companies tend to prefer buyback programs because they reduce the total outstanding share count making it easier to improve EPS. Also, with fewer shares on the market, demand for shares increase, current shareholders own a greater percentage of the company and total dividend payments are reduced therefore making future dividend payments more sustainable. So then why do so many investors dislike buybacks?

Some investors believe share buyback programs signal a lack of better options, such as acquiring other companies or reinvesting in itself through capital expenditures. Another common argument is buyback programs are used to hide flat or declining revenue. While this may be true for some companies, it often leads to earnings beating estimates in future quarters.

SPDR S&P Dividend ETF - Dividend Aristocrat Fund

Top Sectors by %

Weight

Top Holdings

Weight

Consumer Defensive

18.51%

HCP Inc. (NYSE:HCP)

2.72%

Industrials

14.81%

AT&T (NYSE:T)

2.66%

Financial Services

13.96%

Consolidated Edison (NYSE:ED)

2.24%

Consumer Cyclical

9.85%

People's United Financial (NASDAQ:PBCT)

2.14%

Utilities

9.65%

National Retail Properties (NYSE:NNN)

2.00%

Basic Materials

8.15%

Target (NYSE:TGT)

1.83%

Healthcare

7.60%

Chevron (NYSE:CVX)

1.69%

Real Estate

7.23%

Procter & Gamble (NYSE:PG)

1.60%

Energy

4.33%

Clorox (NYSE:CLX)

1.56%

Other

5.91%

McDonald's (NYSE:MCD)

1.55%

Click to enlarge

Source: Scottrade

PowerShares BuyBack Achievers

Top Sectors by %

Weight

Top Holdings

Weight

Consumer Cyclical

28.15%

AT&T

5.11%

Technology

15.59%

Home Depot (NYSE:HD)

5.07%

Communication Services

11.62%

Oracle (NYSE:ORCL)

5.06%

Financial Services

11.40%

Pfizer (NYSE:PFE)

4.91%

Healthcare

11.00%

Halliburton (NYSE:HAL)

3.50%

Industrials

8.17%

General Motors (NYSE:GM)

3.26%

Energy

6.03%

Lowe's Companies (NYSE:LOW)

2.86%

Basic Materials

4.41%

DirecTV (DTV)

2.59%

Consumer Defensive

3.07%

Time Warner Cable (NYSE:TWC)

2.43%

Other

0.56%

Yahoo (NASDAQ:YHOO)

2.16%

Click to enlarge

Source: Scottrade

Performance

PKW Total Return Price Chart

PKW Total Return Price data by YCharts

Daily Returns (%)

YTD

1 YR

3 YR

5YR

SPDR S&P 500 Dividend ETF

5.68%

15.75%

20.31%

16.66%

PowerShares BuyBack Achievers Fund

5.06%

20.30%

25.70%

20.87%

S&P 500 Total Return

8.06%

21.55%

22.65%

17.22%

Click to enlarge

Source: Scottrade

Most investors would be surprised to know that a portfolio tracking companies with large buyback programs has consistently outperformed a dividend aristocrat portfolio. Surprisingly, the dividend aristocrat portfolio under performs the S&P 500 Total Return over YTD, 1 YR, 3 YR, and 5 YR time frames.

When the PowerShares BuyBack Achievers fund is compared to 2 other popular dividend funds, iShares Select Dividend ETF (NYSEARCA:DVY) and iShares US Preferred Stock ETF (NYSEARCA:PFF), it still performs remarkably well. The iShares Select Dividend ETF seeks to track the investment results of the Dow Jones U.S. Select Dividend Index, which measures the performance of a selected group of equity securities issued by companies that have provided relatively high dividend yields on a consistent basis over time. The iShares US Preferred Stock ETF seeks to track the investment results of the S&P U.S. Preferred Stock Index and has an impressive yield of 6.7%.

PKW Total Return Price Chart

PKW Total Return Price data by YCharts

Daily Returns (%)

YTD

1 YR

3 YR

5YR

iShares Select Dividend ETF

6.83%

17.61%

20.31%

18.07%

iShares US Preferred Stock ETF

12.13%

14.13%

9.21%

9.34%

PowerShares BuyBack Achievers Fund

5.06%

20.30%

25.70%

20.87%

S&P 500 Total Return

8.06%

21.55%

22.65%

17.22%

Click to enlarge

Source: Scottrade

Take Away

Companies return value to shareholders through 2 methods, dividends and share buybacks. In 2013, S&P 500 companies returned $330.8 billion to shareholders through dividends and $477.6 billion to shareholders through buybacks. Even though 60% of value returned to shareholders was through buybacks, very few investors look for stocks or mutual funds based on buyback programs. Instead, investors tend to focus solely on dividend yield and dividend stability, which brings investors to funds such as SPDR S&P 500 Dividend ETF, iShares Select Dividend ETF, and iShares US Preferred Stock ETF. PowerShares BuyBack Achievers has a distribution yield of just 0.86%, yet outperforms these 3 popular dividend funds over the long-term. With companies returning more value through buybacks than dividends, investors may want to include a buyback fund such as PowerShares BuyBack Achievers Portfolio when looking for long-term value.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.