This sounds like a great deal for stock holders. But does buying back stock really cause stock prices to outperform? If it really does help boost earnings, why don't we just buy the companies that have bought back the most stock?
It's a tough question to answer, but, as with everything, there's an ETF for that. And the evidence is it can be a big help, but without improvement in fundamentals, investors are not going to be fooled.
There are two ETFs that specialize in buybacks: The Powershares BuyBack Achievers Index (PKW) is comprised of U.S. securities issued by corporations that have effected a net reduction in shares outstanding of 5 percent or more in the trailing 12 months. And the SPDR Buyback Index (SPYB) is designed to measure the performance of the top 100 stocks with the highest buyback ratios in the S&P 500.
OK, so far so good. What's the verdict?
Buybacks vs. the markets
S&P 500 up 13.8 percent
SPDR Buyback (SPYB) up 11.0 percent
PowerShares Buyback (PKW) up 11.3 percent
Well, that's underwhelming. There is no outperformance. It's the same if you go back two years.
It's possible there are too many companies in the ETFs. Both have over 100. But I think there's a bigger problem. Buybacks do not guarantee stock price hikes.
Just look at General Electric, which has bought back 15 percent of its stock just since the start of 2016. It's down 20 percent in that same period.
And look at Kohl's, Target, and IBM. Buyback monsters, all of them, but the fundamentals are awful, and buybacks did not save them. All three are down double-digits this year.
In contrast, Apple's business has been great, as has Microsoft. Both are also buyback monsters, and they are up huge this year.
The lesson: Stock buybacks can boost earnings, but without underlying fundamentals, it's not worth chasing them. Wal-Mart's buyback was certainly a big help, but without the added bonus of additional investments in the e-commerce business, it wouldn't have been a long-term boost.