On Nov. 11, United Technologies Corp. (NYSE: UTX) made the kind of announcement investors love to hear.
The defense and high-tech conglomerate said it was more than doubling the size of its current share-repurchase plan, adding another $6 billion to the $4 billion in stock it planned to buy back before 2016.
United Technologies is far from alone. In just the first six months of this year, U.S. firms spent more than a quarter of a trillion dollars on share buybacks.
And federal data shows that corporate buybacks, which have been rising for years now, are likely to grow even more between now and 2020.
The really good news for tech stocks is this: Technology companies make up the bulk of firms that are racing to repurchase their stock.
Today I'll show you an easy way to cash in on this buyback frenzy.
With it, you can beat the market by more than 30% over the next five years...
As dramatic as the United Technologies announcement was, there was more enticing buyback news for investors.
Just one day before the UTX announcement, the German tech-industrial giant Siemens AG (OTCMKTS ADR: SIEGY) confirmed that it would buy back roughly $3.2 billion of its stock over the next three years. This was the second such program Siemens has adopted since 2013.
That brings me to a key fact driving the current buyback boom. Companies in general, and U.S. firms in particular, are sitting on mountains of cash.
Market research firm FactSet said that at the end of the second quarter, the last period for full data, S&P 500 Index companies held a combined $1.43 trillion in cash on hand. That's the second-biggest cash reserve in the last decade and just a tad below the $1.45 trillion held in last year's fourth quarter.
Many firms are returning a portion of this cash to their shareholders, a move that benefits investors and companies alike.
By reducing the amount of shares out in the market, the companies instantly improve their earnings per share. In turn, that drives up the stock price, because equities trade at multiples of their earnings.
Investors benefit because with fewer shares in the open market, the value of the shares remaining in individuals' portfolios increases.
And if history is any guide, this cash-on-hand trend will only continue.
A 2013 study by the St. Louis Federal Reserve Bank found that U.S. nonfinancial firms have steadily increased their cash holdings going all the way back to 1980 (though they slipped during the financial crisis).
Economists surveyed offered a variety of reasons for the trend, such as building up a war chest for R&D and keeping the balance sheets clean of debt.
But one little-noticed fact really jumped out at me...
In turns out that tech and life sciences firms are building up more cash than firms in other sectors.
In a separate recent report, FactSet said share buybacks totaled $278 billion for the first six months of 2015. But during the second quarter, the last period for full data, the field was led by information technology firms, which had amassed $35.9 billion in cash, nearly 27% of the total.
The bottom line is this: Firms that are buying back stock can make attractive investments. But things aren't quite so simple. You still need to find the best companies.
That's why I think tech investors ought to look at the PowerShares Buyback Achievers Fund (NYSE Arca: PKW).
With high tech and healthcare making up about 25% of this exchange-traded fund (ETF) and materials firms (many of which serve tech industries) accounting for another 6.6%, PKW is an excellent broad-based play on the current buyback frenzy.
That means we get the benefit of...
As you might expect, PKW holds several big caps that are household names.
For instance, it owns aerospace giant Boeing Co. (NYSE: BA), which accounts for 5% of the fund's holdings. In December 2014, Boeing announced it will increase its share buyback program by $2 billion to $12 billion.
Apple Inc. (Nasdaq: AAPL) also accounts for nearly 5% of PKW's holdings. In its most recent fiscal quarter, the Silicon Valley legend repurchased some $14 billion of its stock.
Other well-known tech-related firms in the PKW roster include defense leaders General Dynamics Corp. (NYSE: GD) and Northrop Grumman Corp. (NYSE: NOC). The fund also is invested in International Business Machines Corp. (NYSE: IBM) and Yahoo Inc. (Nasdaq: YHOO).
But PKW also has an interesting mix of small- and mid-cap players. Take a look:
Trading at $47.34, PKW is a cost-effective way to play the share buyback boom. With this one move, you gain access to buybacks underway at more than 200 companies.
Besides tech, PKW is invested in finance, industrials, consumer products, and energy. So it's like holding a very specialized subset of the S&P 500.
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But over the past five years, PKW has greatly outperformed the broad market, returning 100.8% to investors on top of a respectable 1.1% dividend.
Over that same time frame, the S&P 500 had profits of 76% - meaning PKW beat the broad market by 32.6%.
This is the type of tech-related investment you can count on as a foundational play for the long haul.
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About the Author
Michael A. Robinson is a 36-year Silicon Valley veteran and one of the top tech and biotech financial analysts working today. That's because, as a consultant, senior adviser, and board member for Silicon Valley venture capital firms, Michael enjoys privileged access to pioneering CEOs, scientists, and high-profile players. And he brings this entire world of Silicon Valley "insiders" right to you...
This all means the entire world is constantly seeking Michael's insight.
In addition to being a regular guest and panelist on CNBC and Fox Business, he is also a Pulitzer Prize-nominated writer and reporter. His first book Overdrawn: The Bailout of American Savings warned people about the coming financial collapse - years before the word "bailout" became a household word.
Silicon Valley defense publications vie for his analysis. He's worked for Defense Media Network and Signal Magazine, as well as The New York Times, American Enterprise, and The Wall Street Journal.
And even with decades of experience, Michael believes there has never been a moment in time quite like this.
Right now, medical breakthroughs that once took years to develop are moving at a record speed. And that means we are going to see highly lucrative biotech investment opportunities come in fast and furious.
To help you navigate the historic opportunity in biotech, Michael launched the Bio-Tech Profit Alliance.
His other publications include: Strategic Tech Investor, The Nova-X Report, Bio-Technology Profit Alliance and Nexus-9 Network.