Why Investors Love Corporate Stock Buybacks: Miller Tabak
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 plain
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 and
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 performing
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 ( PKW ). 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 ( ORCL ) and American International ( AIG ) accounting for more than 4.0% apiece. The fund rebalances quarterly and attempts to mock the Merchant Buyback Achievers Index according to the prospectus.