Buyback Quarterly - FactSet Insight [PDF]

Andrew Birstingl, Research Analyst [email protected]

BUYBACK QUARTERLY

Media Questions/Requests [email protected]

March 17, 2016

S&P 500

Key Metrics:  Quarterly Buybacks Grow 5.2% YoY in Q4: Dollar-value share repurchases amounted to $136.6 billion over the fourth quarter (Nov-Jan), which represented a 5.2% increase year-over-year (YoY) and a 13.5% decrease from the third quarter (Aug-Oct). On a trailing twelve-month basis (TTM), dollar-value share repurchases totaled $568.9 billion, which was a 0.5% decline YoY and essentially flat with Q3.

 Information Technology Tops Buyback Spending; Industrials & Consumer Discretionary Lead Growth: The Information Technology sector spent $33.2 billion on buybacks in Q4, which was more than any other sector. The Industrials and Consumer Discretionary sectors led all groups in year-over-year growth for quarterly buybacks, posting growth rates of 43.8% and 25.8%, respectively.

 Buyback Spending as a Percentage of Free Cash Flow Rises: The TTM dollar-value buybacks represented 58.3% of free cash flow before dividends in Q4, which marked a 10% jump year-over-year and a 6.4% increase quarter-over-quarter.

 Performance of Buyback ETFs Trail Benchmark Indices: In the past year, the SPDR S&P 500 Buyback ETF declined 7.6% on a total return basis, while the S&P 500 gained 1.3%. Over the same time period, the PowerShares Buyback Achievers Portfolio ETF decreased 6.4% on a total return basis, as the NASDAQ Composite decreased only 0.9%.

 Activists Push for Buybacks and Dividends: In 2015, there were 70 activist campaigns in which a dissident objective was to return cash via dividends and/or buybacks. This represented the highest total since FactSet began tracking the data in 2005.

Quarterly Share Repurchases ($M) and Number of Companies Repurchasing Shares

“Buyback Quarterly” is one part of three reports (“Dividend Quarterly” and “Cash & Investments Quarterly”) analyzing cash and discretionary spending within the S&P 500.

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Share Repurchases Grow 5.2% YoY in Q4 Information Technology Leads Buyback Spending Companies in the S&P 500 spent $136.6 billion on share buybacks during the fourth quarter. This represented a 5.2% increase in spending from the year ago quarter, but a 13.5% decline from Q3. Historically, a sequential decline from Q3 to Q4 has not been uncommon. The reason for this relates to the seasonality of buybacks. Going back to 2005, Q4 has averaged the lowest quarterly dollar-value buybacks, while Q3 has averaged the largest quarterly dollar-value buybacks. Despite the quarter-over-quarter decline, aggregate buybacks in Q4 2015 still marked the sixth highest quarterly amount since the start of 2005. It also represented the third highest post-recession total after the $157.9 billion worth of buybacks in Q3 2015 and $146.6 billion in Q3 2014. The number of companies participating in buybacks during Q4 increased to 378 from 375 in the year ago quarter. The buyback participation was 388 companies in Q3. The Information Technology sector was the top spending group in terms of dollar-value buybacks (similar to Q3). Companies in the sector spent $33.2 billion on buybacks during Q4. Four out of the top ten companies ranked by quarterly dollar-value buybacks were in this sector (Apple, Microsoft, Oracle, and Visa). The full top ten list is shown on page 5 of this report. Expanding the list to the top 25 will reveal some additional well-known names in the Information Technology sector, such as QUALCOMM, Alphabet, and Cisco Systems. Each of these firms repurchased over $1.5 billion worth of its own shares in Q4. It is interesting to note that the Information Technology sector was also the second highest sector in terms of year-over-year reduction in common shares outstanding. Aggregate shares outstanding for the sector declined 2.9%. The only sector to post a larger reduction in common shares outstanding in Q4 was the Industrials sector. Apple was once again the top spender on buybacks in Q4. The iPhone maker repurchased $6 billion worth of shares, with half of the purchases coming from its accelerated share repurchase program and half being bought in the open market. It is interesting to note that in the past quarter, Apple paid a 13% premium to buy back its shares relative to its average daily price for the quarter. This was the second highest premium paid by an S&P 500 company that spent more than $100 million on buybacks during the quarter. Online security firm, Symantec, was the only company that paid a higher premium for its shares.

General Electric and United Technologies Join Top Ten List of Buyback Spenders in Q4 Two newcomers to the top ten list of buyback spenders were General Electric and United Technologies. Both are part of the Industrials sector, which was the top sector in terms of year-over-year growth in quarterly buybacks. General Electric repurchased $3.1 billion worth of its shares in Q4 as a part of its historic $50 billion buyback program that was announced last April. In addition to the repurchase program, GE completed a stock swap with the former GE Capital retail finance division, Synchrony Financial, which had an effect on shares outstanding that was equivalent to a $20.4 billion buyback. As a result, the shares outstanding for General Electric were reduced by 6.7% in the last twelve months. United Technologies is also part of the Industrials sector and provides products and services to the building systems and aerospace industries. UTX repurchased $5.1 billion worth of shares in Q4 as a part of its $6 billion accelerated share repurchase program launched in November.

Sector Trends: Industrials and Consumer Discretionary Lead YoY Growth The Industrials sector led all major buyback sectors (excluding the Telecom and Utilities sectors, which have each averaged less than $2 billion in quarterly buybacks since 2005) in terms of year-over-year growth (+43.8%) in quarterly buybacks. The Consumer Discretionary sector came in second with a growth rate of 25.8%. Six out of the eight buyback groups posted positive year-over-year growth in Q4, with the Industrials, Consumer Discretionary, and Health Care sectors each achieving double-digit growth. The Consumer Staples and Materials sector saw a very slight YoY uptick in buybacks, but for all intents and purposes, quarterly buybacks in these sectors were essentially flat compared to the year ago quarter. Within the Industrials sector, United Technologies, General Electric, American Airlines, and FedEx Corporation were the top contributors to growth. As previously mentioned, UTX and GE led the buyback spending in Q4 with $5.1 billion and $3.1 billion worth of shares repurchased, respectively, compared to just $405.3 billion and $148.6 billion in the year ago quarter. American Airlines and FedEx also helped lift the dollar-value buybacks total for the Industrials sector in Q4. American Airlines increased its buyback spending by nearly $500 million from Q4 2014 and FedEx added over $750 million compared to a year ago. It is interesting to note that aggregate common shares outstanding for the Industrials sector were reduced by nearly 5% year-over-year, which was the largest reduction in shares of all the sectors. Within the Consumer Discretionary sector, Walt Disney was the top contributor to growth. The media FactSet.com


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and entertainment company bought back $2.4 billion worth of its own shares in Q4, which was over $1 billion more than its buyback spending in the year ago quarter. Keep in mind that Disney was the fourth biggest spender on repurchases in Q3, when dollar-value buybacks for the firm hit its highest level in ten years. Several other contributors to year-over-year growth in the Consumer Discretionary sector were Target, General Motors, and Home Depot.

Dollar-Value Buybacks as Percentage of Net Income and Free Cash Flow Rise The dollar amount spent on share buybacks for the trailing twelve months ending in Q4 totaled $568.9 billion, which marked a 0.5% decline year-over-year but was nearly flat f with Q3. Trailing twelve month buybacks made up 68.1% of net income at the end of the quarter. This was an uptick from the S&P 500 ratio a year ago and a quarter ago (64.9% and 58.6%). With repurchases not changing much on a TTM basis, the driver of this climbing ratio can once again be attributed to the continued decline in earnings. The year-over-year earnings decline for the S&P 500 was 3.5% in Q4 2015. The fourth quarter marked the first time that the S&P 500 has seen three consecutive quarters of YoY earnings declines since Q1 2009 through Q3 2009. Analysts do not expect earnings growth to return until Q3 2016. Additional analysis on earnings trends can be found in FactSet Earnings Insight.

Buyback to Free Cash Flow Ratio Climbs to Second Highest Post-Recession Amount Free cash flow is often viewed as a better measure of liquidity for a company than earnings. Previous versions of this report have defined free cash flow as cash flow from operating activities minus fixed capital expenditures minus dividends paid (“free cash flow after dividends”). The dollar amount spent on share buybacks for the trailing twelve months ending in Q4 represented 101.7% of free cash flow after dividends. This was a huge jump from the year ago quarter when the ratio was 81.6%. Free cash flow can also be calculated prior to dividends being paid out (“free cash flow” or “free cash flow before dividends”). The TTM dollar-value buybacks represented 58.3% of free cash flow before dividends in Q4, which marked a 10% jump year-over-year and a 6.4% increase quarter-over-quarter. It was the second highest post-recession ratio after Q2 2015, when the ratio hit 58.4%. On a trailing twelve-month basis, dollar-value buybacks only slightly declined YoY, so the real driver of this rising ratio has been decreasing free cash flow. Aggregate free cash flow for the S&P 500 dropped 9.5% YoY. A big contributor was the negative free cash flow logged by the Energy sector due to slumping commodity prices. With that said, even if the Energy sector was excluded from the index, the ascending buyback to free cash flow ratio of the S&P 500 would still be evident. The Industrials sector saw the largest year-over-year increase in this ratio, as it climbed to 85.6% by the end of Q4 from 71.1% in Q4 2014. American Airlines, 3M, and FedEx were three of the contributors in the Industrials sector, with each company spending more on buybacks in the TTM than they generated in free cash flow before dividends.

Buyback Spending Exceeds Free Cash Flow for 147 Companies In the trailing twelve months ending in Q4, the number of companies that were spending more on buybacks than the amount generated in free cash flow before dividends reached 147. This was 14 more than the count a year ago and well above the average going back to 2005 (124 companies). The Consumer Discretionary contained 33 companies in which TTM buybacks exceeded free cash flow. This was an uptick of seven firms from a year ago. The Industrials sectors came in second with 24 companies, which was nine more than a year ago.

Buyback Yield Remains Below Long Run Average The buyback yield for the S&P 500 in Q4 remained below the quarterly average going back to 2005. The trailing twelve months shares repurchased represented 2.97% of the aggregate shares outstanding in the index. Relative to shares outstanding, the Information Technology sector was the most active buyer of its own shares in the TTM ending in Q4, despite a sequential and year-over-year decline in the ratio. The sector’s trailing twelve-month share repurchases amounted to 4.4% of the sector’s aggregate shares outstanding over the period. The Industrials sector had the second highest buyback yield of all groups (3.8%). Five of the top ten S&P 500 companies ranked by TTM buyback yield were in these sectors. Quanta Services topped the list, as it repurchased 37.3% of its shares outstanding, which helped contribute to a 26.8% YoY reduction in the firm’s shares count. As a whole, the aggregate number of shares outstanding for the S&P 500 at the end of Q4 increased 0.6% year-over-year, but was still slightly below its ten year average going back to 2005.

Repurchasing Shares at a Relative Discount: LUV, DD, MNK, WFM In an effort to find companies that have repurchased shares during periods of depressed prices, this report examines companies’ average price paid for repurchases over the quarter and the trailing twelve months, and compares that to their average stock price over the same period.* Based on this analysis, Southwest Airlines and DuPont bought back their shares at the largest discount in the most recent quarter (12.2% discount and 9.7% discount). Mallinckrodt FactSet.com


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Plc and Whole Foods Market repurchased their shares at the largest discount in the trailing twelve months ending in the most recent quarter (26.3% discount and 20% discount). The full top ten lists can be found on page 11 of this report.

Performance of Buyback ETFs Trail Benchmark Indices To analyze the performance of companies repurchasing stock, the SPDR S&P 500 Buyback ETF (SPYB) and the PowerShares Buyback Achievers Portfolio ETF (PKW) can be used. These are two of the most well-known exchange traded funds for investors looking for exposure exclusively to companies repurchasing shares. The SPYB tracks the S&P 500 Buyback Index, which provides exposure to the 100 constituents of the S&P 500 with the highest buyback ratio in the TTM. The PKW tracks the NASDAQ U.S. Buyback Achievers Index, which is comprised of U.S. securities issued by corporations that effected a net reduction in shares outstanding of 5% or more in the TTM. In Q4 (10/31/15 - 1/31/2016) and over the past year, the total return of the buyback ETFS trailed that of their benchmark indices. The SPYB was down 13% in the fourth quarter and 7.6% in the past year on a total return basis, while the S&P 500 Total Return index only decreased 6.2% in Q4 and gained 1.3% in the past year. The PKW decreased 9.7% in Q4 and 6.4% in the past year, while the NASDAQ Composite was down 8.4% in Q4 and 0.9% in the past year. Looking at a three year time horizon, the PKW gained 38.8%, but still lagged the performance of the NASDAQ Composite, which was up 51.4% over the same time period. When separating out buyback spenders and non-buyback spenders in the S&P 500 and analyzing performance, buyback spenders saw an average monthly equal weighted return of -0.91% in the past year. This trailed the nonbuyback spenders’ return of -0.81% in the past year. This performance analysis can also be done using a marketcap weighted cumulative return and measured relative to the S&P 500 Total Return index. In the past year, companies repurchasing shares saw an excess weighted cumulative return of -1.9% relative to the benchmark, while companies not repurchasing shares saw a return of 9.8% relative to the benchmark. Extending the time frame to three years, buyback spenders had an average equal weighted monthly return of 0.8% and non-buyback spenders had an average return of 0.65%. On a market cap weighted cumulative return basis relative to the S&P 500 Total Return index, companies not repurchasing shares outperformed the buyback spenders over a three year time frame, similar to the one year time horizon (11.5% vs -2.9%).

Activist Investors Push for Buybacks/Dividends at Companies Number of Campaigns Demanding Shareholder Distributions Reaches Record High Even with shareholder buybacks and dividend distributions for companies in the S&P 500 hovering near record levels, activist investors have continued to push for more. In 2015, there were 70 activist campaigns in which a dissident objective was to return cash via dividends and/or buybacks. This was a 37% increase from the number in 2014 (51 campaigns), and represented the highest total since FactSet began tracking the data in 2005. Of these 70 activist campaigns in 2015, the activists were successful in 31 campaigns, which was another record high. Examples of success include: the company declaring a special one-time dividend, increasing its regular dividend, announcing a new share repurchase program, and expanding its existing share repurchase program. So far in 2016, there have been 7 total campaigns in which a dissident objective was to return cash via dividends and/ or buybacks. One of these campaigns has been successful.

*Excludes companies with less than $100m worth of share repurchases

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Dollar-Value Buybacks: Quarterly All aforementioned and forthcoming values are in millions, unless otherwise stated. Quarterly data is organized by adjusted calendar quarters with Q4 ending in January. (Q1:Apr, Q2:July, Q3:Oct, Q4:Jan)

Dollar Value Buybacks – Most Recent Quarter

Top 10 Companies by Dollar-Value Buybacks – Most Recent Quarter

Ticker AAPL UTX MSFT ORCL AIG GILD GE MON DIS V

FactSet.com

Company Apple Inc. United Technologies Corporation Microsoft Corporation Oracle Corporation American International Group, Inc. Gilead Sciences, Inc. General Electric Company Monsanto Company Walt Disney Company Visa Inc. Class A

Sector Information Technology Industrials Information Technology Information Technology Financials Health Care Industrials Materials Consumer Discretionary Information Technology

Quarterly Buybacks ($M) $6,000 $5,100 $3,600 $3,252 $3,218 $3,094 $3,084 $2,550 $2,362 $2,067


QoQ% Chg in Shares Out (0.6%) (5.5%) (0.8%) (1.7%) (4.2%) (1.9%) (7.2%) (5.9%) 6.3% (1.2%)

Quarterly Dividends $2,969 $541 $2,868 $636 $341 $614 $2,335 $254 $0 $340

1 Year Total Return (15.5%) (16.3%) 32.0% (7.3%) (2.7%) (7.7%) 24.9% (21.5%) (6.0%) 8.7%

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Dollar-Value Buybacks: Trailing Twelve Months Dollar Value Buybacks – Trailing Twelve Months

Top 10 Companies by Dollar-Value Buybacks – Trailing Twelve Months

Ticker AAPL MSFT QCOM AIG GILD ORCL UTX WFC ABBV DIS

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Company Apple Inc. Microsoft Corporation QUALCOMM Incorporated American International Group, Inc. Gilead Sciences, Inc. Oracle Corporation United Technologies Corporation Wells Fargo & Company AbbVie, Inc. Walt Disney Company

Sector Information Technology Information Technology Information Technology Financials Health Care Information Technology Industrials Financials Health Care Consumer Discretionary

TTM Buybacks ($M) $39,727 $16,809 $11,631 $10,884 $10,337 $10,283 $9,130 $8,947 $7,599 $7,233

YoY% Chg in Shares Out (4.8%) (3.6%) (9.6%) (13.2%) (5.1%) (4.3%) (7.8%) (1.5%) 1.2% 0.0%


TTM Dividends $11,729 $10,371 $2,900 $1,028 $1,874 $2,471 $2,184 $8,826 $3,294 $3,063

1 Year Total Return (15.5%) 32.0% (21.4%) (2.7%) (7.7%) (7.3%) (16.3%) (7.3%) 2.3% (6.0%)

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Buybacks to Net Income: Trailing Twelve Months Buybacks to Net Income (TTM)

Number of Companies with TTM Buybacks Exceeding Net Income

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Buybacks to Free Cash Flow: Trailing Twelve Months Free Cash Flow is defined as cash from operating activities minus capital expenditures from fixed assets. Free Cash Flow After Dividends is defined as cash from operating activities minus capital expenditures from fixed assets minus cash dividends paid.

TTM Buybacks to Free Cash Flow and TTM Buybacks to Free Cash Flow After Dividends

Number of Companies with TTM Buybacks Exceeding Free Cash Flow

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Buyback Yield Buyback yield is calculated by dividing the TTM shares repurchased by the company’s common shares outstanding.

Buyback Yield by Sector – Trailing Twelve Months

Historical Buyback Yield with TTM Buybacks and S&P 500 PE Multiple

Top 10 Companies by TTM Buyback Yield

Ticker PWR MSI HRB NAVI AIG HOG AAL BBBY TDC STX FactSet.com

Company Sector Quanta Services, Inc. Industrials Motorola Solutions, Inc. Information Technology H&R Block, Inc. Consumer Discretionary Navient Corp Financials American International Group, Inc. Financials Harley-Davidson, Inc. Consumer Discretionary American Airlines Group, Inc. Industrials Bed Bath & Beyond Inc. Consumer Discretionary Teradata Corporation Information Technology Seagate Technology PLC Information Technology

Buyback Yield (%) 37.3% 26.4% 18.3% 16.7% 15.3% 15.2% 14.8% 14.2% 14.0% 13.5%

# of Shares Repurchased (TTM) (M) 60 46 41 58 182 28 92 23 18 40


YoY% Chg in Shares Out (26.8%) (20.7%) (29.1%) (13.2%) (13.2%) (12.8%) (10.4%) (11.9%) (11.6%) (10.0%)

1 Year Total Return (18.8%) 13.4% (10.0%) (36.2%) (2.7%) (15.5%) (12.7%) (33.2%) (37.9%) (30.4%) 9

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Trends in Common Shares Outstanding While share repurchases are a large factor in determining the change in share count of a company, they do not capture such activities as exchange of common stock for debentures, conversion of preferred stock, convertible securities, or stock options, or the issuance of stock for acquisitions. Therefore, the charts below are included to show the aggregate change in shares outstanding. The first chart shows aggregate common shares outstanding in the S&P 500 using a rolling universe and a fixed universe of only the companies that were in the index throughout the time series. The fixed universe is intended to isolate the trend in share count from constituent changes.

Aggregate Common Shares Outstanding – Fixed and Rolling Universe

Year-over-Year Growth in Common Shares Outstanding

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Percent Discount for Repurchases: Quarterly and TTM The average price paid by the company for repurchases is compared to the average daily stock price for the quarter. Companies with less than $100 million worth of share repurchases are excluded.

Top 10 Companies by Repurchase Discount Percent (Quarterly)

Ticker

Company

Sector

Avg Price Paid for Repurchases (Qtr)

Avg Price for the Quarter

Quarterly Repurchase Discount (%)

LUV

Southwest Airlines Co.

Industrials

$38.78

$44.19

-12.2%

DD ILMN HON ALXN CMG INTC NKE STI AMGN

E. I. du Pont de Nemours and Company Illumina, Inc. Honeywell International Inc. Alexion Pharmaceuticals, Inc. Chipotle Mexican Grill, Inc. Intel Corporation NIKE, Inc. Class B SunTrust Banks, Inc. Amgen Inc.

Materials Health Care Industrials Health Care Consumer Discretionary Information Technology Consumer Discretionary Financials Health Care

$57.16 $151.43 $94.26 $161.86 $572.75 $31.49 $58.35 $39.68 $148.37

$63.27 $166.05 $101.95 $174.40 $613.21 $33.44 $61.87 $42.05 $156.90

-9.7% -8.8% -7.5% -7.2% -6.6% -5.9% -5.7% -5.6% -5.4%

Top 10 Companies by Repurchase Discount Percent (Trailing Twelve Months)

Ticker

Company

Sector

Avg Price Paid for TTM Repurchases Avg Price Repurchase (TTM) for the TTM Discount (%)

MNK

Mallinckrodt Plc

Health Care

$74.53

$101.11

-26.3%

WFM

Whole Foods Market, Inc.

Consumer Staples

$32.38

$40.47

-20.0%

MU ILMN BIIB QRVO BWA PCAR MJN T

Micron Technology, Inc. Illumina, Inc. Biogen Inc. Qorvo, Inc. BorgWarner Inc. PACCAR Inc Mead Johnson Nutrition Company AT&T Inc.

Information Technology Health Care Health Care Information Technology Consumer Discretionary Industrials Consumer Staples Telecom

$19.58 $161.12 $298.23 $56.54 $45.34 $52.43 $78.64 $29.89

$23.92 $191.97 $352.53 $64.94 $51.99 $60.07 $89.46 $33.80

-18.1% -16.1% -15.4% -12.9% -12.8% -12.7% -12.1% -11.6%

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Shareholder Distributions Quarterly Shareholder Distributions: Gross Buybacks + Dividends

Capital Distribution Practices: Number of Companies

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Shareholder Activism Number of Activist Campaigns Agitating for Shareholder Distributions 80 70 60 50 40 30 20 10 0 2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

# of campaigns with activist demanding return of cash via dividends/buybacks # of successful campaigns with activist demanding return of cash via dividends/buybacks

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1-Yr Indexed Total Return: Buyback ETFs vs Benchmark Indexed Total Return- 1 Yr: SPDR S&P 500 Buyback ETF (SPYB) vs S&P 500 Total Return

Indexed Total Return- 1 Yr: PowerShares Buyback Achievers Portfolio ETF (PKW) vs NASDAQ TR

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3-Yr and 5-Yr Indexed Total Return: PKW vs NASDAQ Indexed Total Return- 3 Yrs: PowerShares Buyback Achievers Portfolio ETF (PKW) vs NASDAQ TR

Indexed Total Return- 5 Yrs: PowerShares Buyback Achievers Portfolio ETF (PKW) vs NASDAQ TR

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Historical, Forward Performance: Share Repurchase Activity The following charts show cumulative, forward one-month returns based on previous month characteristics, or factors, from a rolling universe of S&P 500 constituents. For all back tests, securities are regrouped dynamically and shown market-cap weighted to ensure that the effects of differences in security weighting between the model and the benchmark have a limited impact on return comparisons. For this back test, S&P 500 companies were broken into two groups: those that have repurchased shares in the TTM versus those that have not repurchases shares in the TTM. No companies were excluded in this calculation.

Historical, Forward Returns- Rel to S&P 500 TR Index- Buybacks vs No Buybacks 1-Yr

Historical, Forward Returns- Rel to S&P 500 TR Index- Buybacks vs No Buybacks 3-Yrs

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