Miller Tabak has issued a paper entitled "Why Investors Love
Corporate Stock Buybacks", in which it notes the S&P 500 index
stands at a fresh record high and has risen more this year (plus
23.7%) than it has since the start of the new millennium (plus
20.1%). It says many onlookers choose to "blame" the "stunning"
2013 rally on excessive liquidity provided by the Federal Reserve's
fifth year of quantitative easing as the economy slowly heals.
Certainly in the latest phase of "bullish euphoria" the market
feels as though it is rising in the dark with investors, and the
Fed, devoid of hard facts to support a rally, it adds.
According to Miller Tabak, investors can beat the broad market
by investing in those companies where management chooses to buy
back its own stock. It notes the S&P 500 buyback index measures
the performance of 100 companies in the index with the highest
buyback ratio during the preceding four calendar quarters. The
Nasdaq listed version of the buyback index can be shown versus the
S&P 500 index to illustrate that investors reward companies
with a shrinking supply of available float to own, it says. It
cites charts showing the four indices since the start of 2000 and
notes that while the S&P 500 index is higher by around 20% over
the period and companies in the buyback index are higher by a
factor of 3.5 times, the differential between the Nasdaq composite
its buyback candidates is "more stunning". That basket has
quadrupled while the Nasdaq composite is still below its value as
at the end of 1999, it says.
Miller Tabak says it took a look inside the S&P 500 buyback
index to see which sectors where most popular in terms of
repurchasing stock and to look at where the greatest value for
money is. Because the composition of the buyback index must by
definition change over time, the data we used measures the price
performance of its members since the end of 2011. Members come and
members go as fresh buybacks are announced.
Miller Tabak says the sector that over the period 2011 to
October 2013 has performed best within the buyback index is the
financial sector. It says repurchases by 18 financial names within
the index has restricted the available pool of equity outstanding
to investors by 10%. During that time shares of those companies
have increased on average by 71%. By contrast the next best
sector is the industrials space, where supply has only been
restricted by a mere 1%. Share prices amongst 11% of the buyback
index have advanced by 66% since the start of 2011.
It says four sectors have witnessed a double-digit pace of share
buyback (financials, consumer discretionary, basic materials and
telecom). However, it says, the telecommunication services sector,
which is represented by only one company, is the worst performer
within the sector space (but not across companies). The average
gain over this near-three-year period amongst these sectors is 50%
while the S&P 500 index is higher by 40%. Only IT and telecom
failed to match the gain of the broad S&P 500 index.
Miller Tabak says one available ETF that attempts to isolate the
performance of companies reducing the available supply of shares
outstanding is the PowerShares Buyback Achievers (
). While the S&P buyback index has increased by 57% over the
near-three year period under our microscope, this exchange traded
fund has risen in value by 54%. It currently counts investments of
ConocoPhillips (COP, 5.28%) and Amgen (AMGN, 5.22%) amongst its
largest members with Oracle (
) and American International (
) accounting for more than 4.0% apiece. The fund rebalances
quarterly and attempts to mock the Merchant Buyback Achievers Index
according to the prospectus.
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