The Logic of Buybacks Most investors are familiar with dividends. Fewer are familiar with share buybacks. Like dividends, share buybacks can be an attractive way to return capital to shareholders. When a company announces that it will buy back its own shares, it means a couple of things... First, the company is healthy and has sufficient cash on its balance sheet to buy back its shares. Second, the company is focused on maximizing returns to its shareholders. By reducing the number of shares outstanding, management increases a company's earnings per share. And it does this without needing to wring out more operational efficiencies from the business. Why don't companies just raise their dividends and pay out their shareholders directly? Share buybacks are a more tax-efficient way to return capital to shareholders. Dividend payments to investors are immediately taxable. In contrast, share buybacks are not a taxable event. And unlike dividend payments, buyback programs can be easily increased or halted in reaction to changing circumstances. How Buybacks Support the Market Share buybacks help support the overall stock market because companies themselves become a key driver of demand for stocks. Many analysts believe that share buybacks helped keep intact the 11-year bull market that ended with the coronavirus crash. Between 2010 and 2019, S&P 500 companies spent nearly $5.3 trillion on share buybacks. That makes today's buyback boom a bullish sign for certain stocks. So far in 2021, companies that have spent money on buybacks have fared better than the broader market. The S&P 500 Buyback Index is up 21% year to date, outperforming the S&P 500 by roughly 10%. Profit From the Buyback Bonanza So how can investors get in on the action? On one hand, you could buy the stocks of the companies that are currently running buyback programs. On the other hand, you could just buy an exchange-traded fund (ETF) like the Invesco Buyback Achievers ETF (Nasdaq: PKW). The ETF tracks the Nasdaq US Buyback Achievers Index, made up of companies that have reduced their number of shares outstanding by 5% or more in the past 12 months. The index's holdings boast an average market cap of more than $45 billion, so many of the companies' names are familiar to U.S. investors. Allstate (NYSE: ALL), Ameriprise Financial (NYSE: AMP), Synchrony Financial (NYSE: SYF), Loews Corporation (NYSE: L) and Equitable Holdings (NYSE: EQH) are the five largest holdings in the fund. So if you want to profit from the buyback bonanza of 2021, take a look at the Invesco Buyback Achievers ETF. Good investing, Nicholas |
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