While companies are hoarding cash, some are anticipating a surge in stock buybacks in the months ahead. Investors can target companies with a penchant for share repurchases via exchange traded fund strategies.
For example, Tyson Foods Inc., consumer-products firm Newell Brands Inc., Morgan Stanley, and alcohol seller Constellation Brands Inc. have stated in recent weeks that they plan to give priority to dividends or share repurchases, the Wall Street Journal reports.
S&P 500 firms are expected to raise cash spending to $2.8 trillion for 2021, covering mostly capital expenditures, mergers, or other types of business investment, according to Goldman Sachs. Additionally, companies have allocated over $680 billion to stock repurchases through July, which only exceeded the amount posted by 2018’s record year, across data going back to 2000.
After companies cut expenditures, reduced dividends and reduced share repurchase programs in 2020, corporate America is now flush with cash in a rebounding economy and plans on increasing spending broadly.
Among S&P 500 companies, cash reserves now make up $1.98 trillion as of Aug. 9, according to Dow Jones Market Data. The current figures are more than 30% higher than the end of the third quarter of 2019.
“There’s certainly enough cash, in my opinion, to not only fuel share buybacks but also to point to future growth through capex initiatives,” Jeff Schulze, investment strategist at ClearBridge Investments, told the WSJ.
As more companies look to add value through share repurchases, ETF investors can also capitalize on the potential opportunity through buyback-themed 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 Invesco Buyback Achievers ETF (NYSEArca: PKW) and the 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. 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.
Additionally, the TrimTabs All Cap US Free-Cash-Flow ETF (BATS: TTAC) tracks quality companies with steady free cash flow. The Pacer US Cash Cows 100 ETF (NYSEArca: COWZ) is another similar option based on free cash flow. The ETFs focus on share reduction, “float shrink,” or buybacks, where companies execute share reductions by diminishing the amount of shares outstanding.
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