Make Money in Buyback Achievers the Easy Way
Mar 18th 2013 10:27PM
Updated Mar 22nd 2013 12:12PM
Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some companies executing significant stock buybacks to your portfolio, the PowerShares Buyback Achievers could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.
ETFs often sport lower expense ratios than their mutual fund cousins. The PowerShares ETF's expense ratio -- its annual fee -- is 0.71%. The fund is fairly small, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This ETF has performed well, handily topping the S&P 500 over the past three and five years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
Not all stock buybacks make sense. If a company is buying back its stock when it's overvalued, it's destroying shareholder value. But sensibly timed buybacks can benefit shareholders, reducing the total share count and thereby boosting the value of remaining shares.
More than a handful of buybacking companies had solid performances over the past year. Motorola Solutions surged 25%, as it has worked on shrinking its debt and growing its free cash flow. The stock is trading near a 52-week high, and yields about 1.7%. It operates in the field of public safety equipment and its government contracts business grew 12% in 2012. The company's fourth-quarter report featured solid earnings gains and revenue up as well.
Norfolk Southern advanced 13%, and is also near its 52-week high. Yielding 2.7%, it's a dominant force in the South, where much of our economic growth potential lies. Our recovering economy should boost business for railroads, which offer much more cost-effective transportation than trucks. The company is also an environmental leader, operating its trains on renewable diesel fuel and developing hybrid locomotives. It's spending heavily on its infrastructure, and has topped performance expectations. One challenge is the decline of coal, as coal has made up a significant portion of Norfolk Southern's business.
Applied Materials gained 6% and yields 2.9%, which includes a recent 10% dividend hike. It's poised to benefit from an expected uptick in semiconductor demand globally, and its growing involvement in areas such as solar power also bodes well. There are already promising signs for the semiconductor industry. With a forward P/E of 14, the stock appears appealing. Applied Materials has been named one of the most ethical companies by the folks at Ethisphere.
Other companies didn't do as well last year but could see their fortunes change in the coming years. Corning , for example, sank 7%, yielding 2.8%. The company, recently upgraded by the folks at Bernstein, is producing glass for LCD displays and smartphones and fiber for telecom networks, among other things. Demand for its Gorilla Glass is strong, generating more than $1 billion in 2012 revenue, and its flexible new Willow Glass is promising, too -- and might end up in Apple's new iWatch. There's a solid case to be made that the stock is attractively priced at recent levels and a good long-term investment.
The big picture
A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
Editor's note: A previous version of this article erroneously stated that Motorola Solutions made the Xoom tablet and Droid Xyboard, which were in fact products of Motorola Mobility. The Fool and the author regret the error.
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The article Make Money in Buyback Achievers the Easy Way originally appeared on Fool.com.Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of Apple and Corning. The Motley Fool recommends and owns shares of Apple and Corning. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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