A new research paper from ETF provider TrimTabs Asset Management finds that 2018 may see corporate buybacks totalling as much USD1 trillion, which would be a 46 per cent increase from last year.
The TrimTabs paper cites the cover story of the 12 May, 2018 edition of Barron’s, entitled “Why the Buyback Boom is Bullish for Investors.”
“This was one of dozens of articles reporting on the flood of buyback announcements. The dollar value of announced buybacks this year is at a record pace. Taking note that not all ‘announcements’ result in a net reduction of a company’s outstanding stock, it has been estimated by Standard & Poor’s Howard Silverblatt that the first quarter of actual stock reductions did indeed set a record: approximately USD190 billion among S&P 500 stocks,” the paper says.
TrimTabs writes that, typically, investors consider buybacks to be a positive as they appear likely to signal future outperformance for a stock versus the market. But according to the new research, investors may want to re-evaluate their assumptions.
“The recent tax cuts afforded to business brings a renewed spotlight on share buybacks, and we are approaching what would be a record level of buybacks this year,” says Ted Theodore (pictured), CIO at TrimTabs Asset Management.
“Most investors assume that this is across the board good news for stocks, but the actual event is more nuanced. First, the stocks with buybacks are not kicking up a storm in terms of performance – in fact, as group they are lagging a bit. Second, to the extent that there are winners and losers in this group, it reflects deeper, even more fundamental, corporate factors at work.”
The research paper found that over the past three plus years, an index focused on companies with a strong history of buying back their own stock has underperformed.
“In general, our research shows that investors should check the balance sheets and scrutinise a company’s free cash flow to gain an additional edge,” says portfolio manager Janet Johnston.
At TrimTabs, the team looks at a combination of free cash flow and strong balance sheets to create a list of high quality names. Their actively managed flagship fund, the TrimTabs All Cap US Free-Cash-Flow ETF (TTAC) has returned close to 50 per cent, since going live on 27 September, 2016, against its benchmark, the Russell 3000, which has returned 37.40 per cent.