Advisors and scores of equity income investors are familiar with the various S&P Dividend Aristocrats indexes. Among the most prominent, there’s the S&P High Yield Dividend Aristocrats Index, which requires member firms to have dividend increase streaks of at least 20 years. Then there’s the even more popular S&P 500 Dividend Aristocrats Index, which sets the bar at a minimum of 25 consecutive years of higher payouts.
There’s a buyback gauge, too – the S&P 500 Buyback Aristocrats Index and it mandates that member firms shrink their share counts every year for a decade. It’s accessible in ETF form via the S&P 500 Buyback Aristocrats ETF (BUYB), which debuted on May 7.
Home to 64 stocks, BUYB attempts to set itself apart from established incumbents by emphasizing repurchase sustainability over short-term buyback trends. Said another way, it’s easy for a company to cut its shares outstanding in a single year only to allow the tally to trend higher the next year, but keeping counts declining for a decade or more takes real commitment.
The new ETF could prove appealing because S&P 500 member firms are on a five-year run of spending more on share repurchases than on dividends.
(Image Courtesy: ProShares)
BUYB Has Exclusivity On Its Side
As noted above, BUYB’s roster is comprised of just 64 stocks giving the rookie ETF an aura of exclusivity, but advisors and investors don’t care about “feels.” They care about results and if history is any indication, BUYB may be able to deliver the goods.
“Companies with a sustained history of buybacks have historically tended to outperform other companies,” according to ProShares. “ Only 64 companies—about 13% of the S&P 500—meet the index’s criteria, underscoring the rarity of sustained buyback discipline. These companies span a diverse set of sectors such as industrials, financials, and consumer discretionary.”
Indeed, BUYB is sector agnostic, but it has to go where the 10 year buyback mandate takes it and that means allocating two-thirds of its weight to industrial, consumer discretionary and financial services stocks. Throw in an almost 23% weight to healthcare and technology names and just five of the 11 global industry classification standard (GICS) sectors represent 90% of the new ETF’s weight.
That concentration risk is offset by the fact that BUYB’s holdings are equally weighted with none exceeding a weight of 2.18%.
Consistency Matters
As is the case with dividend growth stocks, consistency and dependability are parts of the case for buyback aristocrats. Said another way, it’s nice when companies shrink their shares outstanding counts in one year, but it’s even better when they do so over three, five, 10 years and beyond.
Not only is that a signal of quality, but dedication to buybacks shows management is disciplined and that its interests are aligned with shareholders.
“A sustained stock repurchase program suggests that a company maintains a structured capital allocation framework, rather than simply reacting to market conditions,” notes ProShares. “By consistently reducing its share count over long periods of time, a company provides proof that its interests are financially aligned with those of its investors.”
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