Stock buyback announcements have been coming fast and furious lately, as they have for the last few years.
In fact, a 2014 Bloomberg report on stock buybacks showed that across the S&P 500, corporations spent about 95% of their $914 billion in total profits last year on the repurchase of their own shares. Goldman Sachs recently predicted investors will see an extra $1 trillion in stock market gains across 2015 thanks to the current stock buyback binge.
Just a few stock buyback plans of note lately came from Qualcomm, Inc. (NASDAQ:QCOM), which announced in March that it would fund a $15 billion repurchase agreement, and industrial giant General Electric Company (NYSE:GE), which announced a mammoth $50 billion stock buyback plan after divesting itself of some assets to generate cash.
With numbers like this, it’s not hard to get confused in a hurry about the real profit potential that the stock buyback trend presents to investors. After all, share repurchases are good signs because they show that companies are committed to returning capital to investors.
Plus, stock buybacks indeed boost earnings per share metrics by reducing the denominator in that math equation — if a company posts $10 billion in profits over 100 million shares, it has $100 in EPS … but even if the company posts that same $10 billion in profits next year over a reduced share count of 95 million, EPS grow to about $105.
But that’s not really growth, is it? And even if a stock spends a bundle on repurchases, who’s to say that money can’t be better spent elsewhere?
Some companies are certainly benefitting from stock buyback plans right now, but surely not all.
The Best Way to Play Stock Buybacks
Thankfully, while picking individual stock buyback plans can be complicated, playing the overall trend is incredibly easy thanks to exchange-traded funds.
One example is the PowerShares Buyback Achievers Fund (ETF) (NYSEARCA:PKW), a fund that is dedicated to “buyback achievers” that have effected a net reduction of 5% or more in outstanding shares across the last 12 months.
Over the last year, the PKW buyback ETF has outperformed the S&P 500 slightly with 13% returns versus 11% for the index. Yes, that’s even accounting for its 0.68% expense ratio, or about $68 charged annually on $10,000 invested.
The PKW buyback ETF is also nicely diversified by sector, with the five positions now including:
- International Business Machines Corp. (NYSE:IBM) at 5.4%
- Apple Inc. (NASDAQ:AAPL) at 5.1%
- Home Depot Inc (NYSE:HD) at 4.8%
- Boeing Co (NYSE:BA) at 4.4%
- Time Warner Inc (NYSE:TWX) at 3.1%
You could, of course, buy any of these individual stocks based on their impressive stock buyback plans. However, the PKW fund allows for diversification if you simply want to chase the notion that repurchases are a great way to reward shareholders and juice earnings over time.
As of this writing, Jeff Reeves did not hold a position in any of the aforementioned securities.
