After being in the spotlight for reporting lackluster first quarter fiscal 2014 results, technology bellwether Apple (AAPL) recently announced the repurchase of $14 billion of its shares in the two weeks following its earnings release. This share buyback was part of its previously announced $50 billion repurchase plan.
Apple’s CEO Tim Cook admitted that the repurchase was an “opportunistic” move, surprised as he was by the plunge in the company’s shares following the release. Apple shares slumped in the wake of lower-than-expected holiday iPhone sales, which impacted fiscal first quarter results .
Though Tim Cook was being “aggressive” in buying the shares of its own company, the move was not appreciated in certain quarters. There were people who thought that the cash could have been better utilized for driving growth at the company or for a new product launch.
However, its seems that the majority of people, including billionaire activist investor, Carl Icahn, appreciated Apple’s recent move – as reflected by a 1.4% rise in the company’s share price following the news. Carl has been goading the gadget-maker to return more wealth to its shareholders by boosting share repurchases, but he has seemingly given up on this plan for now.
Buybacks in Focus
The recent share repurchase by the company highlights the fact that more and more U.S. companies are increasingly spending on share repurchases to reward shareholders. In fact, the companies are buying back shares at a record pace.
As per S&P and Dow Jones indices, share repurchases increased to $128.2 billion during third quarter 2013, up 8.6% sequentially and 23.6% from the year-ago quarter.
The third quarter figure represents the highest level since the fourth quarter of 2007. Apple alone repurchased more than $40 billion of its shares in the last 12 months and was the biggest buyer in the third quarter of 2013.
This trend is expected to continue as U.S. companies are sitting on a pile of cash on their balance sheets. Also, buybacks have gained precedence over dividends as some believe that they can return more value to shareholders.
Moreover, buybacks are beneficial for the companies as well. They reduce the outstanding number of shares, thereby bolstering the earnings per share number.
This strategy is expected to bode well for PowerShares Buyback ETF (PKW), which includes companies that have repurchased 5% or more of their common stock in the trailing 12 months. This fund might be an interesting pick for those who like the buyback idea, and we have highlighted the fund in greater detail below:
PKW in Focus
PKW tracks the NASDAQ U.S. Buyback Achievers Index, holding a basket of 177 securities. The fund manages an asset base of $2.5 billion, charging 60 basis points as fees to investors.
Though Apple is currently not a part of PKW, its aggressive share repurchase policy might make it a likely candidate for inclusion in the fund, should the buyback ever reach the 5% threshold. The fund is rebalanced quarterly, with the next rebalancing due in April.
The fund already has the second largest exposure to Tech stocks, allocating 16.9% of the total fund assets. Consumer Discretionary stocks dominate the fund, having around one-third of the total fund exposure.
Also, among the top ten holdings of the fund, the tech stocks Oracle (ORCL) and Yahoo (YHOO) together have around 7.4% exposure in the fund.
The fund’s niche strategy has enabled it to outperform broader market indices since its inception. The ETF has been outperforming the broader markets over the last five years. In comparison to the S&P 500’s return of around 32% last year, PKW returned an outstanding 45.6%.
Bottom Line
Apple’s recent buybacks bring to focus the fact that this might be the most preferred way of corporate firms for returning cash to shareholders this year as well. If that be so, the above mentioned fund might continue to outperform the market, and be an interesting selection for investors seeking a broad market play with a twist.