Share repurchases and dividend payments are two popular tools that companies make use of to maximize shareholder value. President Donald Trump’s tax reform has aided these corporate actions immensely in recent years as a great deal of tax savings have led to higher buybacks and dividend payments.
Two decades ago, less than half of the S&P 500 companies bought their own shares back. The participation rate was around 80% as of Dec 31, 2018. The solid momentum in buyback and dividend payments is showing no sign of slowing down at the current level.
S&P 500’s Q3 2019 Buyback & Dividend Scorecard
S&P 500 Q3 2019 dividends set a quarterly record, increasing 6.4% year over year to $123.2 billion. The payment for Q4 2019 is on its way to create yet another record in the $126 billion range. Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, expects dividend payments in 2020 to exceed $500 billion for the first time, as quoted on Wall Street Journal.
On the other hand, S&P 500 share repurchases reached $175.9 billion in the third quarter of 2019, up 6.3% sequentially. However, the Q3 buyback was 13.7% lower than the year-ago level as it was tax savings-inspired. Apple (NASDAQ:AAPL) continues to lead to the buyback squad, spending $17.6 billion, taking the spot of the 8th highest payor historically.
About 22.8% of the companies catered to the buyback route in Q3 of 2019 to reduce their share count by at least 4% and boost their EPS. The proportion of the companies was higher than 17.7% noted in Q3 of 2018.
Tailwinds of tax reform are definitely phasing out. Hence, the levels of 2019 buybacks are weaker than the 2018 level, but considerably higher than the pre-2018 levels. “For Q4, the market is looking for another increase in buybacks, in the mid-single digit range, staying near the $190 billion level," per Howard Silverblatt.
Buybacks Outdo Dividends
Over the years, buyback yield has dominated the dividend yield for the S&P 500 companies. In the third quarter of 2019, buyback yield of the index was 3.12% versus 1.94% dividend yield. Buyback’s direct impact on lowering the company’s shares outstanding and boosting EPS has made it a winner over time. In fact, “heavy spending on share buybacks has helped the stock market hit fresh highs and avoid deeper pullbacks over the past two years,” per an article published on Wall Street Journal.
Overall, buybacks have been a clear winner over dividends. “Since its inception in January 1994, the S&P 500 Buyback Index returned 13.29% annually, compared with gains of 10.31% and 8.96% from the S&P 500 High Dividend Index and S&P 500, respectively,” per an analyst. Risk-adjusted return for the buyback index was 0.86% since inception versus 0.66% on the high dividend index and 0.62% on the S&P 500.
ETF Performances
Below we highlight the price performances of buyback ETFs like Invesco Buyback Achievers Portfolio PKW and SPDR S&P 500 Buyback (NYSE:SPYB) ETF (SPYB) against high-dividend ETFs like Invesco S&P 500 High Dividend Low Volatility ETF SPHD and Vanguard High Dividend Yield Index Fund ETF Shares VYM, and dividend growth ETF SPDR S&P Dividend (NYSE:SDY) ETF (TSX:SDY) (read: Dividend Growth ETFs for Long Term Investors).
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Apple Inc. (AAPL): Free Stock Analysis Report
SPDR S&P 500 (NYSE:SPY
Vanguard High Dividend Yield ETF (VYM): ETF Research Reports
SPDR S&P Dividend ETF (SDY): ETF Research Reports
Invesco BuyBack Achievers ETF (PKW): ETF Research Reports
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD): ETF Research Reports
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Zacks Investment Research