Thursday, October 01, 2015

Buyback Strategy Continues To Lag Broader Market Return

Although S&P Dow Jones Indices reported second quarter 2015 buybacks declined 8.7% versus the first quarter of 2015, the twelve month total increased 3.8% versus the prior twelve month total that ended June 2014. As the below chart shows, this reduction in buybacks on a quarter over quarter basis might be tied to the declining trend developing in as reported earnings (blue line.) In spite of the declining trend in operating earnings, Howard Silverblatt notes, "company cash reserves increased to $1.32 trillion versus the first quarter total of $1.23 trillion." Also, Silverblatt noted in the S&P report,
"Higher levels of shareholder return are now part of the market expectation, with many investors anticipating continued high payouts. While companies currently have the resources and low-cost access to funds to continue this trend, once interest rates increase, the higher costs will eventually influence the decision making process for corporate expenditures. Buybacks may be more susceptible to an interest rate hike, given that they are more discretionary and dividend cutbacks are typically seen as a last resort action. Based on the current data, the Q3 actual dividend payment is expected to be the sixth consecutive quarter of new record payments, with Q4 2015 expected to be the seventh."
From The Blog of HORAN Capital Advisors

It may simply be a spurious relationship, but the buyback index return began to trail the broader market return since the beginning of the first quarter. This can be seen in the below chart comparing the S&P 500 Index to the Powershares Buyback Index (PKW).

From The Blog of HORAN Capital Advisors

Given the decline in equity prices since the market peaked in late May, companies would benefit from increasing buybacks with their share prices at these lower levels. Unfortunately, companies have a tendency to increase buybacks when their shares are near highs. If buybacks do slow in the coming quarters, this will likely be a headwind for an already weak near term earnings growth picture.

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