Shareholder rewards, be they dividends or stock repurchase programs, are central themes for long-term investors. After all, dividends can and do account for significant percentages of a portfolio’s returns over time. Buybacks can signal to market participants that a company’s management team view its shares as undervalued.
Of course, both endeavors require a company to deploy cash. At a time when more investors and regulators are demanding publicly traded companies focus on environmental, social, and governance (ESG) causes, ESG and shareholder rewards may appear to be competing issues. They don’t have to be and some exchange traded funds prove as much. That group includes the Calvert US Select Equity ETF (CVSE ).
Take the case of buybacks, which have drawn bipartisan political criticism in recent years. CVSE is home to a slew of companies that are dedicated buyers of their own shares, but that doesn’t dent the ETF’s ESG credentials.
“Ultimately, repurchases are a strategic use of cash—akin to investing in a new factory, acquiring another business, retiring debt, or paying a dividend. Hindsight, of course, offers perfect vision,” noted Morningstar analyst Adam Fleck.
Buybacks Can Be ESG Tells
Obviously, it costs money for a company to repurchase its own stock. Likewise, some upfront outlays of capital are required to bolster ESG efforts. How a company obtains the cash to reward shareholders can be a tell regarding their ability to finance ESG plans.
“Comparing metrics such as the debt/equity ratio, capital expenditure as a percentage of sales, and return on invested capital versus peers can help to uncover companies that may be pursuing buybacks at the expense of long-term financial health,” added Fleck.
Specific to CVSE, many of its marquee components are among the S&P 500’s biggest buyers of their own shares. Fortunately, they’re also among the most rich American companies, and many are putting their money where their ESG mouths are.
Likewise, financially flawed companies – a trait not pertinent to the bulk of CVSE’s lineup – can only use short-term fixes for so long to obfuscate their problems. Buybacks and new ESG efforts can be among those short-term fixes. Still, companies aren’t bound to live up to those obligations. That confirms the importance of CVSE’s quality tendencies.
“Proper capital allocation analysis, understanding of management incentives, and long-term thinking—all hallmarks of successful investing, ESG or otherwise—are critical to determining the potential success of a firm’s buyback strategy,” concluded Fleck.
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