WisdomTree US Value Fund: High Value Redemptions
By Kara Marciscano
Buybacks are a viral topic as they reached near peak levels in 2021. Many claim these buybacks were made at the height of the market, implying that companies bought back their own shares at overvalued multiples – an inefficient use capital that is likely to earn a poor return on investment for their shareholders.
It’s true that redemptions have been historically high in 2021. And it may be true that some companies could have better allocated capital to less expensive investments, but that’s certainly not true for all.
Not all redemptions are created equal. In fact, our analysis of buybacks within the Russell 1000 Index indicates that most net buybacks have been executed by companies ranked with the highest shareholder return – in other words, by companies buying stocks at more attractive levels relative to their market capitalizations.
Russell 1000 Index – Net redemptions over the last 12 months (M$)
Russell 1000 Index – % net redemptions by shareholder return quintile
Ideally, share buyback programs are opportunistic and anti-dilutive, meaning buybacks are made at discounted valuations and result in a significant reduction in the number of shares outstanding. In this scenario, buyouts have the potential to create value for shareholders by increasing their stake in a company that ideally increases in value over time.
WisdomTree US Value Fund (NYSEARCA: WTV) aims to identify companies that fit within these preferred buyout safeguards and also exhibit superior quality metrics.
WTV ranks and selects companies based on a composite score of their shareholder return and quality measures. In this dual framework, the shareholder yield identifies companies that are repurchasing shares at attractive levels relative to their market capitalization, while the quality component identifies companies with higher relative efficiency, profitability and cash flow. .
WTV held 146 stocks at its last rebalance, capturing 70% of buybacks executed by the 800 largest US stocks over the past 12 months.
Importantly, the average shareholder (6.6%) and earnings (7.5%) returns of WTV constituents are significantly higher than those of non-WTV constituents (1.5% and 3.7%) . In short, this indicates that WTV companies are buying back their stocks at more attractive relative valuations than those outside the basket.
WTV companies are also significantly reducing their stock count. On average, WTV companies have reduced their outstanding shares by 2.8% over the past 12 months, while the rest of the 800 US large-cap stocks universe has increased the number of shares by 1, 1% on average, which dilutes the shareholding.
800 Largest US Stocks – 12-Month Repurchases ($m)
As noted, quality is an equally important ingredient in the WTV recipe. The strategy targets businesses that generate more earnings and cash flow per dollar invested in the business, which is why WTV’s return on equity and assets are at the high end of benchmarks. broad, value-oriented US equities.
A valid concern about buyouts is whether they are debt– or equity-funded. An added benefit of WTV’s quality screen is that the Fund’s constituents have lower leverage ratios than broader benchmarks.
For definitions of terms in the table above, please see the Glossary.
In the current environment of volatility and rising rates, we believe WTV companies, with strong balance sheets and profitability metrics, are well positioned for potential outperformance.
Important risks related to this article
There are risks associated with investing, including possible loss of capital. Funds concentrating their investments in certain sectors increase their vulnerability to any unique economic or regulatory development. This can lead to greater stock price volatility. Although the Fund is actively managed, the Fund’s investment process is expected to be heavily dependent on quantitative models and the models may not work as expected. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.
WTV was formerly the WisdomTree US Quality Shareholder Yield Fund (QSY).
Kara Marciscano, CFA, Partner, Research
Kara Marciscano joined WisdomTree in October 2018 as a research analyst. It supports the creation, maintenance and reconstitution of our actively managed indices and ETFs. Prior to joining WisdomTree, Kara was Assistant Vice President of Equity Research at Barclays covering the insurance sector as well as Berkshire Hathaway. She started her career in the finance department of Barclays after graduating from Boston College in 2014 with a BS in finance and operations management. Kara holds the Chartered Financial Analyst designation.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.