End Your Year with a Stock Pulling in Billions of Dollars Every Quarter
Shah Gilani|December 16, 2021
The closer we get to the supposed jolliest time of year, the more apparent market pessimism becomes.
Inflation worries, repeated sell-offs, and mixed COVID news have nervous nellies more skittish than ever. Many are worried that the typical end-of-year “Santa Claus Rally” will pass them by (maybe they fear a little coal in their stockings, too).
Luckily for us, though, there are plenty of reasons not to be like them.
Here are the big three:
- The bond market is behaving nicely…
- The stock market is on the rise, despite all the volatility…
- And an all too often forgotten market mover is still firing hundreds of billions of dollars every quarter at select stocks.
And even better yet for you, there’s an ETF that captures those inflows and has been on a tear.
In today’s Total Wealth, I’m telling you all about it.
Buy the Buyback
The prime-mover is buybacks. These are share repurchases by companies listed on U.S. exchanges.
Companies bought back a record $234.5 billion of their own shares in the third quarter of this year. The previous record of $233 billion in share repurchases came in the fourth quarter of 2018. The second quarter of 2021 saw $199 billion of buybacks.
And there will be even more next year.
With 2021 almost in the can, S&P 500 earnings look like they’ll end the year at close to $205 per share, a record earnings windfall that’s got the momentum to boot. Profit margins are at a record high of 12.4%. And companies are generating record rivers of excess cash flows.
Hundreds of billions of dollars of all that money flowing down to bottom lines are being earmarked for share repurchases. And as companies generate even more money, especially the ones that can pass along rising prices and plump up their profit margins in the process, even more money will go towards buybacks.
Of course, buybacks reduce the number of outstanding shares against which earnings are calculated, increasing earnings per share metrics and valuation expectations.
The trading desks that execute buyback programs for companies always look for dips to buy into falling prices, which is another reason, and one that’s rarely talked about, that “buy the dip” has been working so well for so long.
In the second half of 2021, alone, we’ve seen Microsoft Corp (MSFT), Target Corp (TGT), Morgan Stanley (MS), QUALCOMM Incorporated (QCOM), Broadcom Inc.(AVGO), and Oracle Corp (ORCL) announce huge buyback programs worth $10-60 billion. As the pace of buybacks picks up, the stocks of companies buying their own shares, some at even higher prices, will keep going higher.
The way to play the rising tide of money going towards buybacks and rising prices of stocks benefitting from those tremendous inflows is by buying all the companies targeting their own stocks for a ride higher.
Since you probably can’t buy all of them individually, you should definitely buy most of them in the form of iShares U.S. Dividend and Buyback ETF (DIVB).
DIVB, not only sports a tidy 2.12% dividend yield thanks to the companies in the ETF’s portfolio throwing off cash to shareholders, but it also holds companies that have some of the biggest active buyback programs.
Buying stocks of companies that buy back their own shares that not only create support levels for themselves, but are also flush with ammo to buy more shares as they’re driving them higher… It’s a strategy that ensures you’ll always be buying dips. Because that’s what the trading desks executing buybacks do for the stocks they’re buying, which happens to be the same stocks in the DIVB portfolio.
That’s how you ride the wave of buybacks and rising stock prices of those companies.
Cheers,
Shah Gilani