Play the share buyback boom with US equities

American companies have huge piles of money stashed around the world; as much as $3.1 trillion¹ is reported to be left abroad. Now they are looking to bring these earnings home.

At the end of 2017, the US government passed a legislation allowing foreign earnings to be taxed at a substantially lower rate of between 8 - 15.5%.  Previously, profits made outside of the US would be slapped with a 35% corporate tax if companies sent these back.

The “windfall” from the tax reforms could see US companies transferring home $1.5 trillion² of their overseas earnings. This could bring the total cash on America’s corporate balance sheets to $3.5 trillion - that is more than the GDP of the UK, currently fifth largest country by GDP³.

How will corporate America do with this cash pile?  Will these be returned to shareholders or be invested for growth?

Be prepared for the return of capital

Since 2011, companies have returned 40% or more of their cash to shareholders and this trend is likely to continue in the near future. It is estimated that for 2019, businesses will return about 49% of their cash to shareholders⁴.

This puts shareholders in line for a significant amount of cash as they will benefit from both dividends payout and share buybacks i.e. companies buying back their own shares in the open market.  In fact, share repurchases could account for the largest chunk of corporate spend. Since the beginning of 2018, companies have been enthusiastically sweeping up their own shares. Share repurchases for the first 6 months of this year are already at 72% of 2017⁵. The value of share buybacks at US$ 770 billion is expected to be 40% more than a year ago and in 2019, it is estimated that companies will spend close to US$940 billion buying back their own shares⁴.

Share buybacks are not a new practice.  For close to 20 years, share buybacks have been a key feature in the US equities market.  Even during difficult market periods, American firms have sustained this practice and returned some capital to shareholders through buybacks.

How do share buybacks benefit you?

Share buybacks are generally well-received by the market. How does it work? When a company buys back its own shares, it decreases the amount of shares available and pushes up earnings per share (EPS).  Higher EPS, post the share buyback program could boost a company’s stock price.

Source: UBS Asset Management

Warren Buffet, one of the most well-known and successful investors has mentioned the benefits of share buybacks in his annual letter to shareholders.

"When companies with outstanding business and confident financial positions find their shares selling far below intrinsic value in the market place, no alternative action can benefit shareholders as surely as repurchases."

Tap the share buyback opportunity with the UBS (Lux) Equity SICAV - US Total Yield (USD) Fund

This Fund invests in companies that have sustainable share buyback programs and dividend payout policies.

According to Jeremy Raccio, portfolio manager at UBS Asset Management, it is not prudent to pick companies just because they have announced a share buyback program. "Some companies may be loading up on debt to fund buyback programs to give their stock price a short-term boost. These companies risk not being able to maintain their buyback programs and their share prices might fall again", he says.

Other than studying how consistently companies have returned capital, Jeremy also ensures that these companies are not too highly levered (the Fund has lower debt / equity ratio compared to benchmarks) and have strong profitability (as illustrated by the the Fund's higher return on equity)⁶:

Potential for high quality income

The Fund offers investors both growth and income potential.  Since the Fund’s inception in February 2013, it has offered an attractive income of between 4.5 - 7% per annum to unitholders⁷.

Speak to Citigold about the share buyback boom.

Please call 02-081-0999 or visit www.citibank.co.th/en/citigold/index.htm for more information.

Sources:

1. Bloomberg, Beware the $500 billion cash exodus, 17 Jan 2018 
2. Bloomberg, $1.5 trillion iin corporate cash is coming to America, 17 Aug 18
3. IMF, World Economic Outlook, October 2018. Based on current prices
4. Goldman Sachs, How companies will prioritize $3 trillion of cash spending in 2019 and investment strategies for portfolio managers, 4 October 2018.
5. Goldman Sachs, US Weekly Kickstart, 14 September 2018
6. Source: Bloomberg, MSCI Barra® US3L, and UBS Asset Management. Data as of 30 September 2018 (active exposure). Past performance is not indicative of future results.
7. Source: UBS Asset Management, as at 30 September 2018, for the P-mdist share class.  This is derived from a simple arithmetic calculation where the dividend is divided by the NAV and annualised thereafter.  Please use this for referece only

Citigold is a wealth management service for clients with total deposits or investments of over 5 million baht with Citibank. Citigold offers end-to-end premier banking solutions including advisory and wealth management services, backed by a dedicated Relationship Manager and team of experts. Citigold also provides in-depth investment and economic insights to help investors make investment decisions. Citigold customers enjoy an array of exclusive, curated lifestyle and banking privileges. For more information, please contact the Citigold Hotline Service at 02-081-0999.

This document is a marketing communication and the information herein should not be considered investment advice or a recommendation to purchase or sell securities or any particular strategy or fund. Information and opinions have been provided in good faith and are subject to change without notice.

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