Banking

Stock Buybacks Aren’t The Free Money You Think

Some investors think of S&P 500 stock buybacks as financial gifts. But ETFs that try to cash in on buybacks show they’re not always the money-for-nothing events you might think.




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At first glance, buybacks look like free money. Microsoft‘s (MSFT) market value jumped more than $37 billion Wednesday. Why? The software giant announced it would buy back up to $60 billion of its own stock. Shares of the Leaderboard stock jumped nearly 2% on the news to 304.82.

And that reflects the view of buybacks this year. When a company buys back shares, there are presumably fewer shares. That’s supposed to make each share more valuable.

So far, Invesco BuyBack Achievers ETF (PKW), the largest ETF focused on companies buying shares, is topping the market this year. It’s up 25.9% in 2021, outperforming the S&P 500’s 19.8% rise.

But the reality is often different longer term, at least with ETFs. Over the past five years, the Invesco BuyBack Achievers ETF is up 97.3%, lagging the S&P 500’s 108% rise.

“ETFs provide diversification benefits since a company that has been actively repurchasing shares can cease doing so or slow down efforts as the company’s fundamentals shift,” said Todd Rosenbluth, head of ETF and mutual fund research for CFRA.

2021 Is A Banner Year For Buybacks

Trillions of dollars are swelling in companies’ cash coffers. And buybacks are one of the ways companies are trying to give the money back to investors in a still tax-friendly way.

More than 200 companies in the S&P 500 announced plans to either starting buying back stock, or boost an ongoing buyback program, says data from S&P Global Market Intelligence. And dollars are adding up. S&P 500 companies are estimated to have spent $198 billion on stock buybacks in the second quarter, says Howard Silverblatt, earnings strategist at S&P Dow Jones Indices.

If that pans out, it’s more than double the amount companies spent in the same period a year ago. It’s also fast approaching the high of nearly $223 billion S&P 500 companies spent on buybacks in the fourth quarter of 2018.

But such buybacks aren’t necessarily wins for investors all the time.

Digging Into Buybacks

The $1.8 billion-in-assets Invesco BuyBack Achievers ETFs shows why a buyback in itself isn’t necessarily a boon for investors.

The ETF itself is outperforming the S&P 500 this year. And the average gain of the top 10 stocks in the index is more than 30%. But it’s not due to a broad gain in all the stocks. In fact, it’s largely due to the runaway 103% jump in its top holding: well-managed computer security firm Fortinet (FTNT).

Digging in further shows that 40% of the ETF’s top 10 holdings are actually underperforming the S&P 500 this year. Meanwhile, 50% of the top 10 holdings in the ETF are underperforming in the past five years.

One reason this might happen: Share counts don’t necessarily fall following buybacks. Companies often issue new shares for compensation. More than half the companies in the S&P 500, 252, will actually boost their number of shares outstanding through the second quarter, Silverblatt says.

And factoring in those that are reducing shares, the S&P 500’s shares outstanding will only fall 0.3% in the quarter. Share counts are actually up 1.4% in the consumer discretionary sector.

Other Ways To Look At Buybacks

There are other ways, though, to play buybacks that seem to work.

Buybacks by global companies seem to be more lucrative for investors. Shares of the Invesco BuyBack Achievers ETF (IPKW), which invests in international buyback kings like Vivendi (VIV) and SoftBank, is consistently outperforming global indexes. The ETF is up 18.9% this year, doubling the Vanguard FTSE All-World ex-US ETF’s (VEU) 9.7% rise. And the international buyback ETF is up 62.9% in the past five years, topping the index ETF’s 43% gain.

Another approach is investing in companies not just buying back stock, but paying dividends, too. That’s working for the iShares U.S. Dividend and Buyback ETF (DIVB) this year. It’s up 22.1% in 2021 so far, topping the S&P 500’s 19.7% rise.

“IShares U.S. Dividend and Buyback takes a broader view of shareholder value and includes dividends, not just buybacks,” Rosenbluth said. “Apple (AAPL), Microsoft, JPMorgan Chase (JPM) and Bank of America (BAC) are top stocks where again tech financials dominate.”

Buyback Focused ETFs

They’re mostly having a good year, but lagging the S&P 500 longer term

ETF Symbol 5-year % ch. YTD % ch. Assets ($ billions) Expense ratio
Invesco BuyBack Achievers (PKW) 97.3% 25.9% $1.82 0.64%
Invesco International BuyBack Achievers (IPKW) 62.9 18.9 0.13 0.55
iShares U.S. Dividend and Buyback (DIVB) n/a 22.1 0.11 0.25
SPDR S&P 500 ETF Trust* (SPY) 108.0 19.8 404.4 0.09
Sources: IBD, S&P Global Market Intelligence through Sept. 15, * – shown for comparison
Follow Matt Krantz on Twitter @mattkrantz

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