New Way to Play Buybacks

PowerShares Capital Management launched three new exchange-traded funds on the American Stock Exchange Wednesday, including one, PowerShares Buyback Achievers Portfolio(PKW), that plays on the dramatic rise in stock buybacks.

Stock-buybacks occur when a company repurchases its shares on the open market. This tends to boost stock prices by reducing the number of shares outstanding and increasing earnings per share.

Activity has really heated up over the last couple of years as companies are increasingly turning to buybacks over other methods of returning value to shareholders, such as paying out dividends.

According to index provider Standard & Poor's, the volume of buybacks among companies in the S&P 500 topped $110 billion in the third quarter of this year, down slightly from a record $117 billion in the second quarter but up 35% from the third quarter of 2005, and up 140% from the third quarter of 2004.

PowerShares President Bruce Bond says that when companies buy back shares, they are basically signaling two positive things: They have additional cash on hand, and they believe their stock is the best investment available at that time.

He adds that companies tend to outperform the market in the months following a buyback.

The PowerShares Buyback Achievers Portfolio holds stocks of 167 companies of all sizes that have repurchased at least 5% of their outstanding shares for the trailing 12-month period. The stocks must also be incorporated in either the U.S. or a U.S. territory and trade on the NYSE, Nasdaq or Amex.