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by Sven Parplies, Euro on Sunday
Matthias Zachert wanted to give an example. In early March, fear of the corona virus already had global exchanges under control, the head of Lanxess went on the offensive: up to 500 million euros would be invested in the purchase of own shares. This underscores confidence in Lanxess’ strategic direction and creates additional value for shareholders, Zachert explained. Four weeks were purchased, then the new command: buybacks suspended! Given the unpredictability of the pandemic, the goal is to preserve liquidity.
In the shadow of the crown epidemic, companies around the world have realigned their priorities: Spending is slashing. As much money as possible should stay at the register to cover basic costs. Stock buybacks are on the strike lists. In the United States, investment bank Goldman Sachs estimates that $ 190 billion in buybacks were suspended in the second half of March alone, which is about a quarter of the previous year’s total.
Buybacks aren’t that popular in Germany as in the United States In the DAX, only a quarter of the index members bought their own shares on a larger scale last year. And there are fewer and fewer: Adidas, Allianz and Munich Re have halted their buyback programs under pressure from the Corona crisis. SAP and Fresenius Medical Care completed their programs in early April, but at least for the time being they will not reissue them. In Linde it is surprisingly quiet: the industrial gases group has reported no activity since March, despite the buyback program.
The sudden exemption illustrates a fundamental dilemma: “Companies often buy their own shares at high prices. In times of crisis, when prices drop sharply and stocks are cheap, programs are often suspended,” notes Philipp Immenkötter of Flossbach. at the Storch Research Institute.
The bad time
The crisis was particularly severe in the last major recession: in 2007, the year before the escalation of the global financial crisis, members of the U.S. S&P 500 eagerly bought their own shares and spent $ 580 billion on them. In 2009, when the stock markets bottomed, the volume fell to 133 billion. This pattern now seems to repeat itself, not only in the United States, but also in Germany.
Example Adidas: Last year, the sporting goods group bought 3.2 million treasury shares for a total amount of 815 million euros, paying an average of 252.80 euros per paper. This was not a problem because the operating business developed well and all expenses could be financed with cash flow. Then the virus came.
The crisis worsened in March as Adidas had to close most of its stores. When the group suspended the buyback program in the middle of the month, the price was now only 173 euros, almost a third below the average purchase price of the previous year. From a financial investor’s perspective, this would have been a good time to do so. Adidas, however, had other priorities, negotiating loans with the state development bank to secure its operating business.
Insurance companies are under pressure from financial regulators. The European Union is even calling for a dividend freeze for the industry. The fact that Allianz and Munch Re suspend their buybacks is interpreted as a commitment that ensures the payment of the dividend.
Other companies are going through the crisis in a more relaxed way: In April, Siemens and Wirecard ordered their own shares from the DAX. This arises from the mandatory notifications of companies. Smaller companies also use low prices. The most recent purchases include the Internet portal Scout 24 and the real estate company Deutsche Wohnen. Aurubis started their program in mid-March. In a first tranche, the copper producer plans to raise shares worth up to € 60 million. United Internet followed in early April and plans to spend up to $ 150 million.
In normal times, share buybacks are an addition to the dividend. The latter goes directly to the bank account of the shareholders. Low interest rates in the capital market, in particular, have made these cash payments a popular source of income, but they must be taxed.
Conversely, buybacks have an indirect effect from the shareholders’ point of view.: If the shares are permanently withdrawn from circulation, the consolidated profit will have to be distributed among fewer papers in the future. Munich Re, as one of the DAX’s most eager buyers, has reduced the amount of outstanding securities by almost a fifth in the past five years. That improves indicators like earnings per share. At the same time, demand artificially increases through buybacks. If successful, buybacks increase the market value. In turn, price gains do not have to be taxed until the shares are sold, that is, at a later time. In some countries, the tax rate is lower than the dividend tax.
Greater flexibility
From a company perspective, buybacks leave more room for maneuver: dividend cuts on the stock market are generally interpreted as a strong signal that a company is in trouble. Stock repurchases, on the other hand, can be relatively quietly suspended to increase flexibility in difficult phases.
When in doubt, caution should be the best way: “Investments in productive capital and balance sheet strength should always take precedence. If there is money left, buying back shares can be a sensible option,” explains expert Immenkötter.
Incidentally, Lanxess should have done a good business with its campaign, which lasted only four weeks: the Rhinelanders bought 1.1 million shares at an average price of € 33.52. Since then, the value of paper has increased almost a quarter. As a stock trader, Zachert has the right feeling.
Investor information
Rhineland’s mobile and internet operator expects business to remain stable despite the Corona crisis. As a dividend from last year, there should be 50 cents a share after the virtual general meeting in May. At 24 percent, the payout ratio is in the lower range of the target broker. This leaves a financial margin for the repurchase of shares. By the end of August 150 million euros will be spent on this. United Internet stock remains a solid investment.
The real estate company is focused on Berlin. Politically, the capital is a difficult place: rental coverage diminishes the potential for return. The living space in Berlin is still coveted. In the Corona crisis, residential real estate offers investors security. Thanks to reliable income, Deutsche Wohnen can continue to buy its own shares in addition to the dividend. In November, the group announced the goal of investing up to 750 million euros in its securities.
alliance
Strategic break
The virus also causes severe damage to insurers. Allianz’s earnings are likely to decline significantly this year. However, the insurance group sticks to its aggressive dividend policy. The € 1.5 billion share buyback program will be suspended after the first tranche of € 750 million. However, the group keeps the option open to resume the program later. The stock remains attractive as a dividend.
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