As we close the books on the second quarter, it’s hard to miss the general lack of optimism. Despite the fact that 70 percent of reporting S&P 500 companies surprised on the upside, the majority of guidance has warned of a third-quarter slowdown.
That’s largely thanks to the fact that just 43 percent of reporting companies beat their revenue estimates in the second quarter, the lowest percentage in over three years. In aggregate, S&P 500 sales grew by just 0.7 percent last quarter.
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Given the weak sales environment, cost-saving measures helped drive earnings growth. Share buybacks, which make for easier per-share comparisons, also made a strong contribution to earnings growth. In the first quarter of this year, S&P 500 companies spent more than $84 billion buying back their shares and more than $400 billion has been repurchased over the past year.
Firm numbers on second-quarter buyback spending aren’t available yet. However, with more than $2 trillion sitting on corporate balance sheets, it’s a safe bet that second-quarter spending was at least in line with—if not greater than—the first. In fact, share repurchases have become de rigueur for creating shareholder value over the past few years.
There’s little reason to suspect that trend will soon shift, since the global economic situation is likely to remain problematic for the rest of this year. The US dollar should remain strong until Europe gets a better handle on its debt crisis and deals with a creeping recession—an extremely unfavorable environment for multinationals. These problems in the developed world will continue to dampen emerging market growth.
That said, investors have been willing to put aside their qualms about revenue growth and instead stick with the earnings winners. The biggest winners over the past few years have been companies that aggressively repurchased their shares.
PowerShares BuyBack Achievers (NYSE: PKW) is an exchange-traded fund (ETF) that holds companies that have repurchased at least 5 percent or more of their outstanding shares for the trailing 12 months. The fund rebalances quarterly to account for any changes in repurchase programs.
This strategy has proven extremely effective since 2008, with the fund outperforming the S&P 500 by a wide margin each year. While the S&P 500 has returned 1.2 percent during the trailing 5 years, Power-Shares BuyBack Achievers has gained 4.5 percent.
Many of the ETF’s holdings—including Intel (NSDQ: INTC), IBM (NYSE: IBM) and Walt Disney (NYSE: DIS)— have beaten their earnings estimates by wide margins. Uncover more top ETF picks by checking out my Top ETFs to Own Now report.