U.S. Buybacks Reach Highest Level Since 2007

ETF Trends

Members of the S&P 500 increased share buybacks by 8.6% during the third quarter to $128.2 billion up from the $118.1 billion spent on share repurchases during the second quarter, according to S&P Dow Jones Indices.

On a year-over-year basis, S&P 500 buybacks climbed 23.6% to the highest level since the fourth quarter of 2007.

“The third quarter was stronger than the 8.6% statistic shows,” says Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices, in a statement. “The Q2 number contains the record setting $16 billion buyback from Apple. In Q3, Apple repurchased $4.9 billion in shares which was still high enough to rank as the largest expenditure for the quarter.”

Even when Apple (AAPL) is excluded from the conversation, the third quarter’s buyback increase was still a tidy 20.8%. Investors that have opted not to stock-pick among firms announcing new or engaged in active repurchase programs have been rewarded by the PowerShares Buyback Achievers Portfolio (PKW) . That ETF has surged 42.5% this year. [Buyback ETF Still Soaring]

PKW’s dominance is made even more noteworthy by the fact that Apple is not yet part of its lineup. The ETF tracks the NASDAQ US Buyback Achievers Index, which “is comprised of US securities issued by corporations that have effected a net reduction in shares outstanding of 5% or more in the trailing 12 months,” according to PowerShares.

The technology sector accounted for a quarter of share repurchases during the third quarter while consumer discretionary names boosted their buyback activity to the tune of 65.7%, according to S&P Dow Jones. Discretionary names account for almost 34% of PKW while tech is the ETF’s third-largest sector weight at 16.5%. [Shrinkage Helping Some ETFs]

A scenario that could increase the allure of PKW is the penchant for U.S. companies to repurchase their own shares when stock prices are elevated, something that was seen in the third quarter.

“Just keeping up with the current bull market means that companies have to pay 25% more for the same number of shares they repurchased last year. However, we are starting to see excess buying, where the repurchases outnumber the issuance, and therefore reduce the share count. The lower share count leads to higher EPS, and the market likes higher EPS,” adds Silverblatt.

Of the 20 largest share repurchasers in dollar terms during the third quarter, 12 were Dow components, led by Pfizer (PFE). Of those 20 stocks, only Oracle (ORCL) and Viacom (VIAB) are significant members of PKW’s lineup.

Top 20 S&P 500 Share Repurchases Q3

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Chart Courtesy: S&P Dow Jones Indices

Tom Lydon’s clients own shares of Apple.

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