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ETF Specialist

What to Make of the Buyback Bonanza

Buybacks are in vogue, but many investors still prefer good old-fashioned dividends.

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A version of this article was published in the December 2015 issue of Morningstar ETFInvestor. Download a complimentary copy of ETFInvestor here.

Big U.S. stocks are in the midst of a buyback bonanza. According to S&P Dow Jones Indices, S&P 500 firms spent a collective $553.5 billion on their own shares during the 12-month period ended June 2015. There are a host of cyclical factors driving this trend. Years into an economic expansion, corporate profitability remains robust, borrowing costs are low, and firms are flush with cash. But growing buybacks also reflect a long-standing shift in how companies are giving cash back to their shareholders. Share buybacks now account for more than half the aggregate amount of cash that corporations are returning to shareholders. Prior to 1982, when the SEC changed its rules with respect to share price manipulation so as to allow companies to more freely invest in their own stock, more than 90% of the cash that companies gave back to shareholders came in the form of dividends.[1] What does investment theory tell us about how we should view this shift in corporations' preferred method of doling out cash to shareholders? And what are its implications for the investment practice?

Ben Johnson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.