Chart of the day: Rewarding US Shareholders

By Marc Chandler, Global Head of Currency Strategy, Brown Brothers Harriman

Those who draw their income primarily from wages have been squeezed. However, those that draw more income from their savings and investments have fared better. This is the story behind the growing disparity of income in the United States.

Shareholders have been rewarded. The top Great Graphic was posted by Matt Phillips on Quartz. It was taken from Goldman Sachs Research. It shows both the authorized and executed share buyback schemes among the S&P 500 through Q3 13. The authorized programs area approached record size.

buy back activity

There are a number of ETFs that try to capitalize on share buyback programs or favorable insider activity or strong hand buying. The Bloomberg chart here shows a the S&P 500s performance since the beginning of last year (purple line), with three ETFs in this space. The white line is PowerShares Buyback Achievers Portfolio (PKW). The yellow line is the Guggenheim Insider Sentiment (NFO), which looks at trends in insider buying and analysts’ opinions. The green line is TrimTabs Float Shrink (TTFS). It uses a screen for to assess the quality of the reduction in the free float. This summary of ETFs in this space should not be confused with a trade recommendation or investment advice.

buyback etf

We are skeptical, though of Phillips effort to draw a connection between the cash holdings of almost $2 trillion to the share buyback efforts. Yet, it seems as if many corporations are borrowing to fund the repurchase programs.

Separately, Phillips points to another way shareholders are being rewarded: dividends. He notes that as of the end of January 420 of the S&P 500 were paying dividends, which is the most since 1998. S&P 500 companies will pay out an estimated $330 bln in dividends this year, which represents a new record.

 

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Marc Chandler

Marc Chandler

Marc Chandler has been covering the global capital markets in one fashion or another for nearly 25 years, working at economic consulting firms and global investment banks. Chandler attended North Central College for undergraduate. He holds masters degrees from Northern Illinois University and University of Pittsburgh in American History and International Political Economy. Currently Chandler teaches at New York University Center for Global Affairss, where he is an associate professor.

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Comments

  1. This touches on the issue discussed here the other day about shareholder value. Buybacks are only done for one reason – to boost share price in the short-term.

  2. The entire lead “Those who draw their income primarily from wages have been squeezed. However, those that draw more income from their savings and investments have fared better. This is the story behind the growing disparity of income in the United States” is flawed. It is a false comparison.

    First, the vast majority of people have no choice about where their money primarily comes from, so it is not like they can choose to have it come from the (according to the author) more advantageous source—savings and investment.

    Second, income is only useful in the pocket. Apart from dividends, the only way to get income from investments is to sell them.

    Third, savers are not faring well at all. Plenty of “investors” are speculators, not savers.

    Fourth, dividends are great, but most stocks do not pay any dividends, and the investor who hopes his income will be primarily from dividends (as the lead implies) would have to own an awful lot of the stock. For example, GE dividend yield is currently 3.42%. At 22 cents per share per quarter, it would require more than 28,000 shares to have a very modest living income of $25,000. The “saver” would need a protected nest egg of $700,000 to produce the income. The wage earner making the same income would have to work 28 years. Probably 99% of people find that getting their living from wages is far more feasible than getting their living from “investments.”

    I am not sure what useful idea the author was trying to convey.

  3. “Buybacks are only done for one reason – to boost share price in the short-term.”

    Maybe so, but in the absence of later issuance, the effect of a buyback on shares outstanding and price per share is permanent.

  4. Or you can likely double that yield by holding dividend-growth stocks for eight to ten years; buying bank, real estate investment trust and insurance company preferred stocks; or both.

    Generating portfolio income is not exciting, but it’s pretty easy.

  5. He was making two points:
    1. Stock ownership is concentrated among the wealthy and this is a key factor in wealth and income inequality. The top 1 or 5 percent DO have 700k in the stock market. Their income — and future income — went up dramatically last year.
    2. This is the major point, imo — when Coca Cola or GM make money, they are sending more of those profits to stock owners rather than employees. Not just via dividends but primarily via capital gains. Again this contributes to inequality.
    And as you suggest, were those profits being paid in the form of wages, that money would circulate more freely. The wealthy take most of their income and add to their savings — again, increasing inequality.

  6. Doubling the yield is not spendable income unless you sell the underlying stock. Holding does not generate spendable income. The doubling is merely on paper anyway. But you will get spendable income from those (comparatively fewer) stocks which pay dividends. But you probably will not total enough to live on.

  7. But that $700K will generate only an extremely modest amount of income to live on. That 1-5% will not be satisfied with such a meager existence. People who might be grateful to live on such small dividends and interest will never be able to save enough to do so. Wages actually generate a giant, regular and relatively risk-free return, which is compounded by any percentage saved.

  8. It’s enough for me.

    By saving at least ten percent of your salary in an income-oriented portfolio including dividend growth stocks and other income vehicles, anyone can have portfolio income resembling their salary within 25 years or less. Anyone.

    It all comes down to discipline.

    And by the way, plenty of preferred stocks have “spendable” yields over 7%. You just don’t know about them.

  9. As you can see by my lead comment, I am assuming an annual spendable income of just $25,000. I am also assuming (but I guess it needs to be said) most Americans which according to recent data have a median income of around $50,000. That means half are below. Most “anyones” do not have access to preferred stock, whether they know about them or not.

    Plenty of 401(k)s with ” an income-oriented portfolio including dividend growth stocks and other income vehicles” belonging to people who retired in 2008 did not even come close. Many of these 401(k)s had professional management. I know because I did the tax returns. People were shocked that their 401(k) could lose 50% of its (paper) value and there was still some tax owed on the bit of return left. Many also completely forgot that deferred income tax does not mean no income tax.

    And who is going to make the portfolio for most people since not only is professional management often incompetent, but also most people have difficulty getting enough to qualify for management early enough for time to actually make the difference it can make.

  10. “Most… do not have access to preferred stock…”

    I disagree. Everyone has as much access to preferred stock as they have to common stock. I believe every broker sells preferred stock.

    “Plenty of 401(k)s with ” an income-oriented portfolio including dividend growth stocks and other income vehicles”…”

    401(k)s do not generally support low-cost income investing; they offer expensive actively managed mutual funds seeking gains rather than income. No dividend growth stocks nor any other income vehicles. The least worst option in a 401(k) is usually an index fund. So yes they get clobbered when the market crashes, with little or no portfolio income to buy the dip.

    I agree most people never learn to invest properly, in part because 401(k)s lead them astray. I encourage people to try harder.