The Buyback Boost Goes Bye-Bye
Buybacks have not only fallen out of style on Wall Street. They are quickly becoming faux pas.
Shares of companies that have bought back more than the average amount of their outstanding shares in the past year are trailing the overall market by the biggest margin in a decade. And the dip in investors' enthusiasm for buybacks seems to be growing lately. The PowerShares Buyback Achievers ETF, which holds U.S. companies that have repurchased at least 5 percent of their shares in the past year, has dropped 2.5 percent in the past month. The S&P 500 Index in the same period is up slightly. So far this year, buyback stocks, as measured by the PowerShares ETF, are up just 10.7 percent, lagging the S&P 500's 2017 return by 6.6 percentage points.
Before this year, a portfolio of companies that regularly repurchased their shares beat the market in six of the past nine years, sometimes by a wide margin. Buyback stocks, for instance, were up 45 percent in 2013, which was 13 percentage points better than the market in general. In all, the PowerShares Buyback ETF has beaten the market by 25 percentage points in the past nine years.
The decline in investor interest in buybacks is due in part to a drop in repurchases themselves. So it may not be a surprise that the boost these stocks are getting is falling as well. Buybacks are on pace to drop 21 percent this year to their lowest level since 2012. Vincent Deluard, a strategist at broker-dealer INTL FCStone Financial, says that the drop in buybacks was the result of what he says has been a bond bubble and ever falling interest rates. A lot of buybacks were funded with bond offerings. Now that rates have started to creep up a bit, fewer companies are repurchasing their shares.
Nonetheless, most people on Wall Street think next year could be a bonanza for buybacks. That's mostly because of the Republican tax plan, which includes a tax break for companies that repatriate money they have overseas. Most analysts think a good portion of that cash could go to buybacks. Goldman Sachs estimates that buybacks could rise back to nearly $600 billion next year, up $100 billion from its current quarterly run rate. What's more, while buybacks are down, buyback authorizations are up 18 percent this year, according to Goldman. So you might expect investors to bid up the shares of companies that have bought back their shares in the past in anticipation of new buybacks.
Instead, those shares have lagged. That could mean that investors have either lost faith that a tax plan will happen, and there is some evidence for that, or lost faith in buybacks, which have persistently pushed the market forward for the past few years. The latter may be better for the economy over the long term if companies actually choose to invest that money in expanding or improving their businesses, or boosting wages. But for stock investors looking for the long bull market to continue, it's not good news.
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