Stock buybacks can be controversial. A company uses its cash to buy its own shares in the open market. This lowers the share count, which increases earnings per share. The idea is that the rising EPS will help to support higher share prices over time. But things may not be so simple. Investors should always take a close look at companies’ buyback activity.
The Invesco BuyBack Achievers ETF
PKW
has a good performance record against the S&P 500
SPX,
as it has followed “a derivative value strategy,” according to Nick Kalivas, head of factor and core product strategy for exchange-traded funds and indexes at Invesco.
Before taking a look at this ETF, here are some points to consider about buybacks:
- They may not actually lower the share count. Many (or most) large companies reward their executives by handing them new shares as part of their compensation, which raises the share count.
-
When a company announces that it has repurchased shares, take a look at the average share count used to calculate its EPS. A company’s earnings press release will include its income statement. In its second-quarter income statement, ConocoPhillips
COP,
+1.23%
reported that its average diluted common share count for the quarter was 1.210 billion, down 7.4% from a year earlier. On the other hand, Citigroup Inc.
C,
-0.51%
reported a 0.5% increase in its average diluted second-quarter share count from a year earlier on page 110 of its second-quarter 10-Q report filed with the Securities and Exchange Commission. Citi’s share count increased even though the bank spent $1.05 billion on buybacks over the four-quarter period, according to FactSet.
So a company might be repurchasing shares, but not in sufficient quantity to lower the share count. This doesn’t necessarily mean bad news for investors if a company is in a good competitive position or has been improving its operating efficiency, but it illustrates the need for investors to look beyond the first number they see, which will be dollars spent on buybacks.
Sifting for effective buybacks
The Invesco BuyBack Achievers ETF tracks an index made up of 315 stocks listed on U.S. exchanges whose share counts had declined by 5% or more over the previous 12 months, when the index was last reconstituted. The index is reconstituted annually on the last trading day of January, based on available share-count information as of Dec. 31.
The fund was launched in December 2006, has $1.76 billion in assets and is weighted by capitalization, with a 5% cap on each holding when it is reconstituted each January and when it is rebalanced on the last trading day of April, July and October.
That’s it for the criteria. Now let’s look at performance.
First, here are the fund’s total returns for various periods through Monday, compared with those of the SPDR S&P 500 ETF Trust
SPY
and the iShares S&P 500 Value ETF
IVE
:
| ETF | Ticker | 2023 return | Return – 3 Years | Return – 5 Years | Return – 10 Years | Return – 15 Years | Return since end of 2006 |
| Invesco BuyBack Achievers ETF | PKW | 7% | 58% | 58% | 162% | 422% | 336% |
| SPDR S&P 500 ETF Trust | SPY | 14% | 38% | 62% | 207% | 379% | 322% |
| iShares S&P 500 Value ETF | IVE | 9% | 50% | 50% | 148% | 260% | 202% |
| Source: FactSet | |||||||
The returns assume dividends are reinvested and are net of annual expenses, which are 0.61% of assets under management for PKW, 0.0945% for SPY and 0.18% for IVE.
The results are mixed, with the Invesco BuyBack Achievers ETF leading for the three-year and 15-year periods, and since the end of 2006.
Here are the average annual returns for four periods:
| ETF | Ticker | 3 year average return | 5 year average return | 10 year average return | 15 year average return |
| Invesco BuyBack Achievers ETF | PKW | 16.6% | 9.6% | 10.1% | 11.6% |
| SPDR S&P 500 ETF Trust | SPY | 11.2% | 10.1% | 11.9% | 11.0% |
| iShares S&P 500 Value ETF | IVE | 14.4% | 8.4% | 9.5% | 8.9% |
| Source: FactSet | |||||
The Invesco BuyBack Achievers ETF is rated four stars (out of five) within Morningstar’s “U.S. Large Value” fund category.
That category selection reflects the fund’s performance tendency, which is “to do well when the value factor is doing well,” Kalivas said during an interview.
During 2022, when the SPDR S&P 500 ETF fell 18.1% and the iShares S&P 500 Value ETF declined 5.4%, the Invecro BuyBack ETF was down 10.2%. (All returns in this article include reinvested dividends.)
Value stocks are generally those trading lower to book value or earnings than growth stocks trade — they tend to be mature companies for which investors focus on efficiency, cash flow and at times, dividends.
The Invesco BuyBack Achievers ETF’s better performance during 2022 isn’t enough to explain its outperformance over SPY over the past three years. Kalivas said that about half of PKW’s outperformance over the S&P 500 over the past three years has been “related to the financial sector.”
Not owning PayPal Holdings Inc.
PYPL,
“has been a big contributor,” he said, adding that being “overweight” in Ameriprise Financial Inc.
AMP,
and Aflac Inc.
AFL,
relative to the index, were also important factors in the outperformance.
Kalivas also credited a heavier weighting to industrials than that in the S&P 500. He said the fund’s outperformance mainly reflected its stock selection. Then again, “the allocation to sectors themselves has been a slight negative,” he noted.
What makes PKW’s strategy unique, Kalivas said, is that “the value signal is coming from the management of the company reducing the share count and signaling to the market that the stock is inexpensive relative to other options that are available for the cash.”
Here are the top 10 holdings of the Invesco BuyBack Achievers ETF:
| Company | Ticker | % of the Invesco BuyBack Achievers ETF |
| Comcast Corp. Class A |
CMCSA, |
13.4% |
| ConocoPhillips |
COP, |
9.3% |
| Amgen Inc. |
AMGN, |
6.4% |
| Morgan Stanley |
MS, |
6.4% |
| Lowe’s Cos. Inc. |
LOW, |
3.1% |
| Booking Holdings Inc. |
BKNG, |
3.1% |
| Cigna Group |
CI, |
3.0% |
| HCA Healthcare Inc. |
HCA, |
2.9% |
| Charter Communications Inc. Class A |
CHTR, |
2.9% |
| Marathon Petroleum Corp. |
MPC, |
2.8% |
| Source: FactSet | ||
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