US companies have been returning a lot of cash to their shareholders in the form of dividends and repurchases. Per S&P Dow Jones estimates, S&P 500 (SPY) companies returned a record $242 billion to shareholders in the first quarter of 2015 via buybacks and dividends, beating the previous high of $233 billion in the second quarter of 2007.

Last month, US companies announced $141 billion of new stock buyback programs which was the highest level ever for a single month. With this increase it is expected that  2015 will reach $1.2 trillion worth of announced buyback programs, far ahead of the earlier record set in 2007 according to Birnyi associates.

Many US companies currently have record high cash balances and record low debt. S&P 500 companies currently hold about $1.75 trillion in cash and marketable securities. With a shaky global economy and uncertainty regarding the Fed’s rate hike, US companies are reluctant to spend on expansion but they have been using a lot of excess cash to buy back their shares.

Further with earnings growth difficult to come by, companies tend to use buybacks to provide a lift to their shares. Pressure from activist investors is also one of the factors behind this surge.

Many investors prefer dividends to buybacks as they are simpler to understand and put money in the pocket. However, buybacks have their own advantages—they reduce the outstanding share count and thus increase earnings per share and in turn, share price. Further, they are more tax efficient.

The buyback binge has been one of the important contributors to the stock market’s bull-run over the past six years. Repurchases reduce the number of shares outstanding, propelling EPS growth and in turn boosting share prices.

Studies show that that companies that reduced their shares through buybacks outperformed the broader market historically with lower volatility. Investors should thus take a look at a couple ETFs that focus on companies repurchasing their shares. Please watch the short video below for more information.

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