Share Buybacks: A Quality-Factor Strategy
Q&A with Joe Becker
This document is directed at Professional Clients in the UK and Professional Clients
and Financial Advisers in Austria, France, Germany, Italy, the Netherlands, and
Qualified Investors in Switzerland only and is not for consumer use.
Discover the Power of Share Buybacks
What is a share buyback programme? How does it work? Isn’t it just
a US phenomenon? Joe Becker, Senior Income Product Strategist at
Invesco PowerShares, shares his insights on this potential investment
opportunity and explains how an ETF can provide diversified exposure
to this single-factor strategy.
Joe Becker
Senior Income Product Strategist
Invesco PowerShares
What is a buyback programme?
A buyback programme is an initiative by a publicly traded company to buy a designated
amount of its own stock over a designated time period. For example, a company may
approve a buyback programme to purchase $1 billion of its shares over the course of a year.
How does a buyback programme work and what advantages are there over the
traditional means of returning value to shareholders like dividend payments?
To understand how a buyback programme works, it’s helpful to remember that stock
ownership, at its essence, represents a claim on corporate earnings. Part of the role of
management is to determine how best to pass along those earnings to shareholders
and a stock buyback is one of two basic ways that management can do that.
When a company initiates a buyback programme and actually repurchases shares with
its earnings to reduce shares outstanding, each remaining share then represents a
larger piece of the company and a larger claim on its future earnings.
Hypothetical buyback of 20% of shares outstanding
EPS before buyback: US$1 10%
10%
10%
10%
10%
10%
10%
10%
10%
10%
EPS after buyback: US$1.25
12.5%
12.5%
12.5%
12.5%
12.5%
12.5%
12.5%
12.5%
All else equal, share buybacks create a up-lifting
effect on earnings per share (EPS).
For illustrative purposes only.
Potential Benefits of Share Buybacks
–
Companies buying back their own
shares are usually profitable
–
Their management is shareholder friendly
–
Their stock price is often below fair value
The repurchased shares go into the corporate treasury and are not factored into the
earnings per share calculation, which puts upward pressure on future earnings per share.
Compare this to when a company pays out a dividend with its earnings. Now in order for an
investor to earn the total shareholder return, that dividend must be reinvested in shares of
the company. However, taxes on that dividend prevent the investor from fully reinvesting.
Consider this hypothetical return of capital to investors. Suppose an investor owns 100
shares out of 10,000 shares outstanding of company ABC valued at $20 per share and that
the company wants to return $10,000 in after-tax earnings ($1 per share) to investors:
Invesco PowerShares:
Leading the Intelligent ETF Revolution
PowerShares was founded in the US in
2003 on a vision of delivering investment
performance through the benefit-rich
Exchange Traded Fund (ETF) structure.
In January 2006, PowerShares expanded
its vision by becoming part of Invesco Ltd,
whose global presence took the Invesco
PowerShares story beyond the US.
When the first ever ETF was launched in
1993, its purpose was simple — to track the
S&P 500 Index while trading on a major
exchange. Since then, many traditional
ETFs have been designed to mirror a
number of different benchmark indices.
Not all ETFs, however, seek to simply track
a measure of a market.
Invesco PowerShares offers a selection
of ETFs that track “next generation”
indices: indices that go beyond merely
tracking a particular market. These indices
attempt to outperform the performance
of a particular market through intelligent
security selection and weighting. Invesco
PowerShares is part of Invesco Ltd., a
leading independent global investment
management company dedicated to
helping people worldwide build their
financial security.
www.invescopowershares.net
Scenario 1: Dividend payment
In scenario A, the investor receives $100 in dividends, but must pay $20 in taxes. After
payment of the dividend, the stock price falls by the amount of the dividend, leaving the
investor with $80 to reinvest at $19 per share. This increases his ownership by 4.2%.
Share Price: $20
Annual Dividend: $1
Div $100
Available for
Reinvestment: $80
Reinvest
% Increase in
Ownership: 4.2%
(Assuming 20%
withholding tax rate)
(At $19
per share)
(104.2/10,000 =
1.042%)
Scenario 2: Stock buyback
In scenario B, instead of paying a dividend, the company uses the $10,000 to buy back its stock.
At $20 per share, it purchases 500 shares, resulting in a 5% net reduction in shares outstanding.
The investor’s 100 shares now represent a larger portion of the shares outstanding.
Allotment for Share
Buyback: $10,000
Buyback
(At $20
per share)
Reduction in Shares
Outstanding: 500
Result
% Increase in
Ownership: 5.3%
(100/9,500 =
1.053%)
As a result, relative to dividends, share buybacks may represent a more tax-efficient
way for companies to pass earnings on to investors.
For illustrative purposes only. We assume that fractions of shares can be purchased.
How have the share prices of securities performed following the buyback of shares?
If we think about it from a purely fundamental level, it isn’t difficult to understand how a
reduction in shares outstanding could result in a higher share price. If after a buyback,
both future earnings and the earnings multiple remain the same and a single share
now represents a bigger claim on those earnings, it is only natural that share should go
up in price. Naturally earnings can change along with the earnings multiple investors
are willing to pay for those earnings, and so a price increase is never guaranteed, but
generally speaking, buybacks put upward pressure on earnings per share.
It’s also important to distinguish between gross and net buybacks. While many companies make
stock repurchases, not all of them result in a net reduction in shares outstanding. Research by Ford
Equity Research1 has shown a direct relationship between the size of the reduction in outstanding
shares and their excess return relative to their respective sector over the following four years from
buyback implementation. The strategy in the PowerShares Global Buyback Achievers UCITS ETF
focuses solely on companies that have effected a net reduction in shares outstanding.
1
Source: Ford Equity Research, Research updated on 20 November 2013 “Portfolios
using share Buybacks”.
With US companies having been involved in share buybacks for a number of years,
will this continue as many have now re-rated since the lows of 2009?
Over time, the rate of share buybacks certainly has an ebb and flow to it. In recent years,
corporate buyback activity has been higher, due in no small part to the very low interest
rate environment and the relatively limited investment opportunity set for companies
to put their cash to work. Cash on corporate balance sheets sit at all-time highs both for
companies in the US and around the globe, leaving them with ample means to continue
to return cash to shareholders via share buybacks. In an environment where cash earns
nothing and where global growth constrains the business investment opportunity set,
buybacks remain an attractive option for companies to generate value for shareholders.
It’s widely believed that the buyback phenomenon is a US centric theme, is this the case?
This perception is likely due at least in part to the relative size of the US market and the
US media complex. There is indeed a great deal of buyback activity in the US, but it is in
no way limited to the US. The mechanics and efficiencies of buying back stock apply to
companies regardless of where they are located and companies around the globe are
using buybacks to return value to their shareholders.
Investors who find this strategy of interest can gain exposure through the new
PowerShares Global Buyback Achievers UCITS ETF; can you tell us a bit more
about the index provider and the methodology used to construct the index including
any constraints on single country/company exposure?
This ETF aims to provide investors with investment results, which before expenses,
correspond to the price and yield performance of the NASDAQ Global Buyback Achievers
Index, which is comprised of corporations that have effected a net reduction in shares
outstanding of at least 5% in the trailing twelve months. No country can have a weight
greater than 60% in the index and no single stock can have a weight of more than 5%. This
helps to maintain diversification within the index. The index offers a disciplined, rulesbased approach to invest in companies that have bought back their own stock. As at 30
September 2014 approximately 60% of the index was comprised of US-based companies,
with the remainder based in countries like Japan, Canada, Australia and the UK.
02
Share Buybacks: A Quality-Factor Strategy
Q&A with Joe Becker
PowerShares Global Buyback Achievers UCITS ETF
ETF data as at 21 January 2015
Index data as at 31 December 2014
Investment objective
The PowerShares Global Buyback Achievers UCITS ETF aims to provide investors with
investment results which, before expenses, correspond to the price and yield performance
of the NASDAQ Global Buyback Achievers Net Total Return Index (a float modified market
capitalization weighted index) in US dollar terms by replicating all of the constituents of the
index. The portfolio follows the index’s semi-annual evaluation and quarterly rebalance.
Fund information
Umbrella fund
PowerShares Global
Funds Ireland PLC
Fund manager
Invesco Global Asset
Management Ltd.
Investment
Invesco PowerShares
manager
Capital Management LLC
Custodian
BNY Mellon Trust
Company (Ireland) Limited
Inception date 24 October 2014
2
Ongoing charges 0.39% p.a.
Income treatment Distributing
Dividend schedule Quarterly
UCITS compliant Yes
Domicile Ireland
UK reporting status Seeking
Investment method Physical replication
Replication method Full replication
Currency hedged No
Total net assets US$77.8m
NAV per share US$25.95
Number of index constituents
187
Shares in issue 3,000,001
Financial year end 30 September
Base currency USD
EU savings directive
Out of scope
ISIN
IE00BLSNMW37
WKN A114UD
SEDOL (US$/GBp) BM4NQQ6/
BLZHC17
VALOREN 24‘464’708
Registrations for
AT, CH, DE, FR, IT,
public distribution
NL, UK
Benchmark index NASDAQ Global
Buyback Achievers
Net Total Return Index
Benchmark index description
The NASDAQ Global Buyback Achievers™ Index is comprised of securities from the
NASDAQ US Buyback Achievers™ Index (comprised of corporations that have effected
a net reduction in shares outstanding of 5% or more in the trailing twelve months) and
from the NASDAQ International BuyBack Achievers™ Index (comprised of corporations
that have effected a net reduction in shares outstanding of 5% or more in their latest
fiscal year). The index began on 11 August 2014 at a base value of 1000.
Index performance
Jan
09
Oct
09
Jul
10
Apr
11
Dec
11
Sep
12
Jun
13
Mar
14
Dec
14
1200
1000
800
600
400
200
0
Past and backtested performance is not a guide to future returns. Source: Bloomberg L.P.. Investors
cannot invest in an index directly. The NASDAQ Global Buyback Achievers Index returns represent backtested
performance for the period 30 January 2009 to 8 August 2014 and actual performance from 11 August 2014,
based on rules used in the creation of the index. Backtested performance does not represent actual performance
and should not be interpreted as an indication of such performance; it is provided for illustration purposes only.
Backtested performance has certain inherent limitations. For example, it ignores certain factors such as the trade
timing, security liquidity and the fact that economic and market conditions in the future may differ significantly
from those of the past. Accordingly, backtested performance is not a guide or an indicator of future returns.
Index country allocation
(%)
United States60.55
Japan11.36
Canada6.32
Mexico4.70
Australia4.02
France3.95
Netherlands2.93
United Kingdom 2.31
Germany0.63
Other Countries0.66
Not in NQGI 2.57
(US-listed)
Source: NASDAQ Global Indexes Research, as at 31 December 2014.
Trading information
Stock exchange
Borsa Italiana Deutsche Börse (XETRA) Euronext Paris London Stock Exchange London Stock Exchange SIX Swiss Exchange 03
Exchange
code
BUYB BBCK BUYB BUYB SBUY BUYB Trading
currency
EUR EUR EUR US$
GBp US$ Share Buybacks: A Quality-Factor Strategy
Q&A with Joe Becker
Bloomberg
ticker
BUYB IM BBCK GY BUYB FP BUYB LN SBUY LN BUYB SW Bloomberg
iNAV
IBUYB Index IBUYB Index IBUYB Index n/a n/a n/a Reuters
RIC
BUYB.MI BBCK.DE BUYB.PA BUYB.L SBUY.L BUYB.S Trading hours
(local time)
09:00 - 17:30 09:00 - 17:30 09:00 - 17:30 08:00 - 16:30 08:00 - 16:30 09:00 - 17:30 Minimum
investment
1 share 1 share 1 share 1 share 1 share 1 share Settlement
t+2
t+2
t+2
t+2
t+2
t+2
Risk Warnings
The Value of investments and any income will fluctuate (this may partly be the result of exchange
rate fluctuations) and investors may not get back the full amount invested.
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The ongoing charges figure is based on annualised expenses. It excludes portfolio transaction costs.
2
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