Now that the economy is less rosy looking than a year or two ago, fewer company executives report or discuss share-buyback programs.
However, in the most recent quarterly earnings report from Walmart (WMT) we got just that, a big, new buyback announcement. Wal-Mart announced a new $20 billion share buyback program, and it should be noted that Walmart is currently just a $400 billion company.
While on the surface, a 5% buyback amount may not seem like a lot, if you dig deeper into Walmart, that 5% buyback, in reality, turns into a 10% buyback based on today's market capitalization. The reason is the Walton family and family trust and foundation control a little more than half of all Walmart shares.
While the family and its Foundation do sell stock from time to time, they have never sold a sizable enough amount to really move the needle. Thus, it is likely that the $20 billion buyback Walmart announced will be purchasing shares not owned by the Walton family and therefore coming from the stock trading on the open market, which is less than 50% of shares outstanding.
Owning a stock like Walmart or, even better, AutoZone (AZO), which has repurchased around 85% of its stock since 1998, can increase the value of your portfolio over decades of ownership. This occurs even when the company you own operates in a boring, slow-growth, or even cyclical industry, like retail.
Now there is some debate about whether or not you would rather have a company you own buy back stock or pay you a larger dividend.
Some investors would instead take a more significant dividend so they can invest it in other stocks, while some investors would rather that money be used to buy back stock.
This is honestly one of those situations where it is more or less a personal decision on which way you would rather a company give you back part of the profits it earns.
A few ways you can invest in companies that participate in share buyback programs is with Exchange Traded Funds. Start by looking at Invesco BuyBack Achievers ETF (PKW) and iShares Core Dividend ETF (DIVB).
Both of these ETFs track US-based companies that have a history of share buybacks. PKW is more focused on share buybacks as it focuses on firms repurchasing at least 5% of their outstanding stock in the previous 12 months, while DIVB owns companies that pay dividends and buyback stock.
Over the last five years, both funds are up slightly more than 11% on a 1-year annualized basis. However, both are down just around 8% year-to-date.
PKW has a 0.64% expense ratio, while DIVB only charges 0.05%. DIVB also has a 1.94% distribution yield, while PKW only pays out 1.08%. PKW is the more pure-play if you want a stock buyback focused ETF, but from the numbers, ie, expense ratio, yield, and even performance, DIVB is probably the better buy at this time.
Another option is the Invesco International BuyBack Achievers ETF (IPKW). IPKW will be very similar to PKW, but it only buys non-US-based companies.
However, the IPKW performance is not very good, both in the short and long terms. IPKW is down 14% year-to-date and only returned 2.35% annualized over the last five years.
The last two ETFs worth looking at are the Pacer U.S. Cash Cows 100 ETF (COWZ) and the FCF US Quality ETF (TTAC).
These two ETFs buy stocks based on their free cash flow. They each look at a broad index of stocks and pick their holdings based on the best companies from a free-cash flow standpoint.
I know what you are thinking, "why would I buy an ETF based on free cash flow when I want share buybacks as my priority."
Well, if a company has strong free cash flow, it will likely offer a dividend and have a share buyback program in place. Year-to-date TTAC is down just 11%, but COWZ is up 5.66%. Over five years, TTAC is up 11.33% annualized, and COWZ is up 15.18%.
Unfortunately, the only real pure-play share buyback ETF is PKW, and honestly, it isn't a great option. If you want to own an investment focusing on share buybacks, I would look at individual stocks, such as Walmart or AutoZone, or DIVB and COWZ.
Matt Thalman
INO.com Contributor
Follow me on Twitter @mthalman5513
Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
