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The Safest Way To Profit From $455 Billion In Stock Buybacks
9/19/2013 9:30:00 AM
Over the past few years at StreetAuthority, we've been chronicling the remarkable pace of share buybacks. So many companies are buying back $500 million or even $1 billion instock that this trend has become one of the most powerful themes of the currentinvesting era.
The collective result of all of those individual corporate actions is simply staggering.Analysts at J.P. Morgan report that a hefty $455 billion inshares has been reacquired by companies in the Russell 1000 in the 12 months ended June 30. That's a 32% increase from the prior 12-month period.
In fact, if you go back to the start of 2009, companies have reacquired $1.4 trillion of their stock. That "far exceeds the netequity withdrawals by investors," noted J.P. Morgan's analysts. In effect, these analysts have concluded that in the absence of buybacks, this stunningmarket rally would never have existed.
What can you expect in the years ahead? Many more buybacks. Companies remain loath to pursue acquisitions, even with huge amounts ofcash parked on their balance sheets. So an increasing amount of annualcash flow is heading towards buybacks (and dividends).
Yet with the major market averages now up so sharply since the start of 2009, should investors look at buybacks as a wise use of corporatecapital ? The sage response: You can't time the market. The market tends to rise over time, and if companies wait for the moment that their stock pulls back sharply to lower levels... well, that day may never arrive.
As noted, JP Morgan analysts suggest that the sharply reduced amount of shares trading hands explains thisbull market . After all, share prices are affected by supply and demand, and a reduced supply of stock pushes up prices, according to economic theory.
Yet there's another, more obvious reason why buybacks boost share prices: the impact onearnings per share ( EPS ) . The percentage of shares that are being bought backwill boost per share profits by that exact same percentage (offsettingstock option grants notwithstanding). Simplyput , a steady series of buybacks can help a slow-growing company deliver the kind ofEPS growth that is usually reserved for faster-growing companies.
Take do-it-yourself home retailer Home Depot ( HD ) as an example. Since 2004, its shares count has fallen more than 30%, to 1.5 billion. The company earned $3.10 a share in its fiscal 2013 -- but were it not for that massive stock buyback program, per-share profits would have been 30% lower.
We periodically highlight companies that are pursuing massive stock buybacks, most recently last month.
But there is an even more direct way to benefit from the trend: buyback-focused exchange-tradedfunds (ETFs ). Let's take a closer look.
Risks to Consider: These are bull-market ETFs. The PowerShares Buyback Achievers ETF slumped badly in late 2008 and early 2009, and the TrimTabs would likely also fare poorly in a falling market.
Action To Take --> The distinct approaches taken by these ETF providers each has real merit. Yet neither is ideal. It's a shame that the PowerShares fund decides to wait a full 12 months before snapping up shares of holdings, and the TrimTabs ETF's focus on cash-flow-fueled buybacks shrinks its potential universe. But both of these ETFs appear built to deliver solidgains as long as the buyback frenzy continues.