Are Buyback ETFs in Troubled Waters?
Zacks Investment Research | Apr 15, 2020 02:00AM ET
Share repurchases, one of the popular tools that kept Wall Street charged-up in all these years, are now under pressure in a coronavirus-rattled economy. Buybacks is a mean for companies to maximize shareholder value as well as boost their own shares.
Backed by low interest rates and sturdy balance sheets, buybacks have added around $5 trillion to the stock market $729 billion .
However, the coronavirus outbreak and the resultant lockdowns in several countries have wreaked havoc on economies and businesses, causing severe cash crunch. This led the S&P 500 companies to suspend $190 billion in repurchases during late-March. The magnitude marks roughly 25% of last year’s buy-back total. Senate’s “phase 3” COVID-19 bill also deterred many companies from repurchasing shares.
Per Goldman Sachs, companies in the S&P 500 Index will likely slash their share buybacks by 50% to $371 billion by 2020-end. Not only buybacks, dividend payments are also at stake. Goldman Sachs projects a 25% year-over-year drop in dividends.
Banks Announce Brief Suspension of Buybacks
WFC — suspended share buybacks temporarily for the rest of the first quarter and the second quarter of 2020 as the coronavirus crisis has roiled businesses and in turn markets. Many other U.S. banks have also decided on the same.
Oil Firms Cutting Buybacks & Dividends
Energy companies are known for paying out high dividends. Exxon Mobil Corp. BP yield about 8.07% and 10.04%, respectively. Amid the ongoing oil market rout, maintaining the huge dividend payouts is a tall order.
Occidental Petroleum (NYSE:OXY) Oil Firms May Cut Dividends Ahead: ETFs & Stocks in Focus ).
more discretionary ”) to save on dividend payments.
A Few More Potential Halts in Buybacks
U.S. airline companies — the worst hit by coronavirus — have BA too had to walk the same path.
Chipmaker Intel EAT halted both its dividend payouts and buybacks.
ETF Performance
We would like to note that overall sentiment in the buyback space is likely to be grim till the summer months. Pureplay buyback ETFs like Invesco Buyback Achievers Portfolio SPYB (up 0.3%) have underperformed the broader S&P 500 index (up 2.96%) in the past month (as of Apr 13, 2020).
Notably, PKW includes corporations that have effected a net reduction in shares outstanding of 5% or more in the trailing 12 months, while SPYB tracks performances of the top 100 stocks with the highest buyback ratios in the S&P 500 in the past year. With buybacks are being called off now, past records may not be a good guide to gauge the expected share performances of those companies.
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