Though share buybacks reached post-financial crisis highs in Japan and the US last year, activity is likely to peak in 12-24 months, says investment research firm TrimTabs.
The ¥682 billion ($6.7 billion) of repurchases in the first four months of this year indicate that 2014 may match or exceed 2013’s tally of ¥2.1 trillion, says Chen Minyi, who manages the TrimTabs Float Shrink Exchange-Traded Fund (ETF).
Australia and Singapore saw share repurchases increase last month.
The firm plans to launch a US-listed ETF investing in Asian companies that are conducting share buybacks.
Share repurchases make sense in the current environment, Chen says, because the US economy is growing slowly and companies are reluctant to expand rapidly. But activity is likely to slow once economic recovery strengthens.
“A lot of companies are holding a record amount of cash on their balance sheet,” he notes. “They don’t want to increase capital expenditure, so they have to return cash to investors, either by paying dividends or buying back their own shares.”
With $671 billion in shares repurchased in the US in 2013, the year was the busiest since 2007.
This year to early May, buybacks in the US reached $192 billion.
In 2009, share repurchases had dipped to $131 billion in the US, as companies’ cash flows and balance sheets were squeezed.
US companies on average spend twice the amount of cash on share buybacks as they pay out in dividends, TrimTabs data show. Share repurchases reduce the total shares outstanding, effectively returning cash to investors by increasing the share price.
Buybacks can be reversed, whereas dividends are less flexible if companies do not want to reduce regular payments to investors.
“Usually when a company initiates a stock buyback programme,” Chen says, “it’s because it thinks it is undervalued. The market is weak this year, so you have companies going back into the market [to buy back shares]. They have a lot of cash on hand and they need to spend it.”
TrimTabs launched the actively managed share-buyback Float Shrink ETF in 2011. The fund trades intra-day and typically rebalances monthly. Its assets under management have reached $125 million.
The ETF screens stocks according to criteria including declining share float, decreasing leveraging and growing cash flow.