Share buybacks: price maintenance in times of crisis

Corporations may be buying more of their own stock this year than ever before. In view of the difficult economic situation, there has been criticism of the multi-billion dollar programs.

Oil companies in particular have recently drawn attention to themselves with buyback programs worth billions and dividend increases. Buoyant profits from high energy prices allow BP, Shell, Total Energies, Chevron and Exxon to return a record $30 billion to investors through share buybacks and dividends.

The experts at Goldman Sachs expect that the companies listed in the S&P 500 will buy back shares worth a total of around 1 trillion dollars this year in the USA. Experts expect buybacks to be at a record high this year.

Billion dollar programs also in Germany

The German stock market is a long way from this magnitude. According to the German Association for the Protection of Securities (DSW), there is currently no clear trend towards buybacks in Germany. Nevertheless, they are popular: According to calculations by the “Handelsblatt”, the DAX companies are said to have spent around 18 billion euros on share buybacks in 2021 – a record.

Adidas, SAP, Deutsche Post and BASF, among others, had already announced share buybacks this year. And the industrial gases group Linde had doubled the current program to ten billion dollars at the end of February.

stocks to get cheap

In view of the recent drop in share prices, companies are probably calculating to get the shares at relatively low prices at the moment, because prices have tended to fall recently. Buying back shares causes the number of share certificates available on the market to decrease. This is good news for investors because the lower supply and higher demand is driving the price higher. On Wall Street, the numerous buyback programs worth billions are even considered an important factor in the price rally of recent years.

Price and investor care is therefore an essential factor for companies. No wonder, then, that players in the financial markets appreciate share buybacks. But there are other reasons as well: A side effect of the smaller number of shares in free float is that hostile takeovers are made more difficult.

“From our point of view, a share buyback can make sense if the operative business is also very well positioned in terms of investments and there are no acquisitions that need to be financed,” says Marc Tüngler, CEO of DSW tagesschau.de. “And: The shareholders must also receive an appropriate dividend in the event of a buyback.”

“Signs of a lack of operational creativity”

Critics of the instrument therefore point out that share buybacks can also be interpreted as a form of lack of ideas on the part of management. Instead of making investments in the future of the company with the available capital, money flows out of the company. “DSW is of the opinion that buying back its own shares is usually only the third-best option for using excess liquidity,” says Tüngler.

Before doing so, every company should check whether there are any other profitable investments in its business, says the expert. “We also think a distribution to the shareholders is a better solution. Share buyback programs are then sometimes a sign of a lack of operational creativity.”

Negative effects in times of crisis

Another point of criticism is that these financial resources could be lacking in times of crisis. The most recent example would be the corona pandemic or the current economic crisis after the Russian attack on Ukraine, which have caused severe turmoil on the financial markets. And there are currently some indications that the global economy could lose momentum massively.

“If buybacks accumulate at the expense of intelligent and well-planned investments, this can lead to negative effects on the overall economic situation in the medium term,” says Tüngler. Especially in tense times it can be very important “to keep the powder dry”. “Share buybacks are always expensive, without the company benefiting directly from it. At the moment, such buybacks are therefore to be viewed critically in principle,” judges the investor protector.

US tax on share buybacks

A tax on share buybacks is currently being prepared in the United States, and the Democratic Party would like to raise it from companies at a rate of one percent. It could be due from January 1, 2023. This should encourage corporations to invest in their business, according to Democratic US Senator Ron Wyden. The tax is also intended to motivate companies to distribute their profits in dividends, which are taxed at a rate of 15 to 20 percent in the United States.

However, US market experts do not assume that the tax will have a major impact on the practice of corporate share buybacks. She is too small for that.