ETFs to Capture Increasing Buyback Activity

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U.S. companies have announced another round of aggressive share repurchases in response to the savings from the recent corporate tax cuts, and investors can also benefit from the plans through a targeted exchange traded fund strategy.

Large U.S. companies have announced share buybacks exceeding $200 billion in the past three months, or more than double for the same period year-over-year, the Wall Street Journal reports.

For example, some companies that have announced share repurchases include Cisco Systems Inc. at $25 billion, Wells Fargo & Co. at about $21 billion, PepsiCo Inc. at $15 billion, AbbVie Inc. at $10 billion, Amgen Inc. at $10 billion and Alphabet Inc. at $8.6 billion.

An uptick in buyback announcements occurred in December as Washington lawmakers put the finishing touches on a bill to cut U.S. taxes by $15 trillion over a decade. The tax overhaul plans reduced the tax rate on large corporations to 21% from 35% and it also included a low one-time reprieve on profits hoarded from abroad to encourage repatriating more than $2 trillion held in overseas subsidiaries.

The result is Corporate America is once again flush with cash, and many are looking at their new found cash stores as a means to produce more value for investors through share buybacks. Of the S&P 500 companies, 28% revealed they would use the tax gains to increase shareholder returns, according to Morgan Stanley's analysis - the bank expects companies to spend about 43% of their savings on buybacks and dividends, and 30% on capital expenditures and labor.

“Companies are feeling some pressure not to just spend their savings on buybacks,” Joseph Amato, president and chief investment officer for equities at Neuberger Berman Group LLC, told the WSJ. “But at a time when we’re already seeing double-digit earnings growth around the world, they can’t hurt.”

Consequently, as more companies look to add value through share repurchases, ETF investors can also capitalize on the potential opportunity through buyback-centric ETF strategies.

For instance, ETF investors who believe in a rise in share repurchases can look to ETFs that specifically target companies that implement buyback schemes, including the PowerShares Buyback Achievers Portfolio (NYSEArca: PKW), the SPDR S&P 500 Buyback ETF (NYSEArca: SPYB) and more recently launched iShares U.S. Dividend and Buyback ETF (Cboe: DIVB).

PKW includes a broader selection of U.S. companies that have effected a net reduction in shares outstanding by 5% or more in the trailing 12 months. SPYB focuses on S&P 500 companies with the highest buyback ratio in the past 12 months. Lastly, DIVB is comprised of U.S. stocks with a history of dividend payments and or share buybacks where holdings include those with the largest dividend and buyback programs in the market measured by dollar value,

For more information on the buybacks strategy, visit our buybacks category.

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