One strategy that may be well positioned to emerge stronger from market volatility is investing in companies with a history of repurchasing their own shares when they believe their stock is undervalued. Stock buybacks allow management teams — who have insider knowledge of their businesses — to cut through market noise and focus on the company’s perceived long-term value. Much like an individual investor purchasing shares with the hope of appreciation, companies that strategically repurchase their own stock at favorable times can enhance shareholder value. The reverse can also be true too, poorly timed buybacks can be detrimental.
May improve earnings per share and price-to-earnings ratio
A stock buyback or share repurchase reduces the number of publicly available shares, which can potentially boost the value of the remaining shares. For example, repurchasing shares can improve key financial metrics like earnings per share (EPS), since the same net income is spread across fewer shares. A higher EPS can also improve other financial ratios, such as the price-to-earnings (P/E) ratio, making the company more attractive to investors.
Record buyback announcements
Companies undertake buybacks for various reasons, but they often view it as an investment in themselves — especially when they believe their stock is undervalued. So far this year, US companies have been repurchasing stock at a record pace. Year-to-date buyback announcements have exceeded $650 billion, as of May — the highest level ever recorded at this point in the year.
Consider PKW and IPKW
Investors looking to capitalize on buyback strategies can consider ETFs that focus on companies engaging in significant share repurchases. PKW, the Invesco BuyBack Achievers ETF targets US companies that have reduced their outstanding shares by at least 5% in the most recent fiscal year. For international exposure, IPKW, the Invesco International BuyBack Achievers ETF, follows a similar approach with international firms.
Get more information on these ETFs below.
