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Stock Buybacks Are Being Maligned

Stock buybacks have been the topic of discussion lately. Not from an investment strategy perspective, but more so from the perspective of what corporations should be doing with their cash. This is not surprising given the tax cuts, strong corporate earnings and the ongoing conversations surrounding worker pay. While some of the arguments may seem new, buybacks have long had their detractors.chart

As the new tax law was being put together last year, there were some concerns about corporations using the savings to repurchase shares of their stock. During the first quarter of 2018, S&P 500 index companies spent a record $189.05 billion on share repurchases, according to data from S&P Dow Jones Indices (SPDJI). Last week, SPDJI senior index analyst Howard Silverblatt tabulated second-quarter buybacks as totaling $164.4 billion based on data from the 85% of S&P 500 companies to have reported as of August 10, 2018. This puts last quarter on pace to rank second in terms of total dollars spent on share buybacks.

It’s not just buybacks that have grown. Dividends totaled $109.18 billion in the first quarter and $111.60 billion in the second quarter this year. Yet dividends have not gotten the pushback that buybacks have.

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AAII Model Portfolio Update

No changes were made to the Model Shadow Stock Portfolio last month; the next quarterly review is scheduled for the end of this month. As of the end of July, four stocks currently held in the portfolio qualified for purchase according to the portfolio’s rules: Delta Apparel Inc. (DLA), Hallador Energy Co. (HNRG), Olympic Steel Inc. (ZEUS) and Strattec Security Corp. (STRT).

The AAII Model Shadow Stock Portfolio, which is a real-money portfolio of micro-cap value stocks, lost 1.72% in July. The Vanguard Small Cap Index fund (NAESX) added 1.82% on a total-return basis, and the DFA U.S. Micro Cap fund (DFSCX) gained 2.20% in July.

Since its inception in 1993, the AAII Model Shadow Stock Portfolio has a compound annual average return of 15.5% versus the Vanguard 500 Index fund’s (VFINX) gain of 9.6% per year. Over the same period, the Vanguard Small Cap Index fund (NAESX) posted an average annual gain of 10.4%.


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AAII Sentiment Survey

Pessimism dipped back below its historical average after having been above average for two consecutive weeks. Bearish sentiment has not been above its historical average for a span of more than three weeks for approximately the past 52 weeks. More about this week’s results.

This week’s results:

  • Bullish: 36.2%, down 0.2 points
  • Neutral: 34.8%, up 2.1 points
  • Bearish: 29.1%, down 2.0 points

Historical averages:

  • Bullish: 38.5%
  • Neutral: 31.0%
  • Bearish: 30.5%

Take the Sentiment Survey.


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The Week Ahead

Nineteen stocks from the S&P 500 will report earnings, including retailers Kohl’s Corp. (KSS) on Tuesday and Target Corp. (TGT) and Lowe’s Companies Inc. (LOW) on Wednesday. Medical device company Medtronic PLC (MDT) will also report next week on Tuesday.

The minutes from the August Federal Open Market Committee meeting and July existing home sales data will be released on Wednesday. Thursday will feature the August Purchasing Managers’ Index (PMI) composite flash and July new home sales. July durable goods orders will be released on Friday.

Federal Reserve Atlanta president Raphael Bostic will speak on Monday. The Jackson Hole Annual Economic Symposium will start on Thursday.

The Treasury Department will auction off $14 billion of five-year Treasury inflation-protected securities (TIPS) on Thursday.


Local Chapter Meetings

AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!

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