Buyback ETF's Five-Year Return Creaming the S&P 500
Comment of the Day

February 11 2013

Commentary by Eoin Treacy

Buyback ETF's Five-Year Return Creaming the S&P 500

Thanks to a subscriber for this interesting article by John Spence from which may be of interest to subscribers. Here is a section
“With interest rates at record lows, corporate cash balances at record highs, and tax policy visibility as low as it could ever be, corporate spending on buybacks came in 50% higher in 2012 than the average in the preceding decade,” ETF Base reports. [Buyback ETF in Focus as Companies Repurchase More Stock]

“Buybacks aren't as visible as dividends, and thus their impact on stock prices isn't immediately observed by investors,” it notes. “This leads to controversy among investors who feel that buybacks might not be as rewarding to shareholders as continued reinvestment in the business, dividends, or acquisitions. Studies point to higher returns for companies that repurchase shares, however.”

Eoin Treacy's view As corporate bond spreads have contracted the number of companies tempted to optimise their balance sheets by issuing new debt to buy back their equity has increased. This allows the company to swap lower cost debt for higher cost equity. (Also see Comment of the Day on December 11th )

The PowerShares Buyback Achievers ETF is currently somewhat overextended relative to the 200-day MA but a sustained move below $30 would be required to question medium-term scope for additional upside.

Taking a longer-term perspective, as companies choose to delist, (Dell for example), reduce the available inventory of shares outstanding and others delay or choose not to list the supply of equity is contracting. This offers an interesting comparison with the bonds markets where supply is increasing at a prodigious rate. If we think in simple terms, would we rather own the asset someone is eager to purchase from us or the asset someone is eager to sell us? I know which I would rather own.

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