Fund in this article
Shares in this article
ETFs in this article
Indices in this article
by Sven Parplies, Euro on Sunday
Apple is a profit machine: 83 billion dollars net cash were last on the balance sheet of the iPhone manufacturer. And new money comes in all the time. In the first half of the current financial year alone, the group generated a net profit of 52.4 billion dollars. This poses an unusual problem: what to do with the wealth?
A small part of the current income is distributed to the shareholders as dividends. In the first half of the year it was more than seven billion dollars. Another instrument is more popular with Apple: The company spent more than $ 43 billion on the purchase of Apple shares. This sum alone is greater than the market value of many DAX companies.
Apple’s financial policy is an extreme case, but it is also an increasingly common role model. With the global economy still suffering from the pandemic, many companies are returning to a controversial habit: share buybacks. US corporations alone have already released more than $ 500 billion for the purchase of their own shares this year. The pre-Corona level could already be reached in the coming year.
The Europeans are also going on the offensive. The advance by LVMH caused astonishment. The French luxury goods company wants to buy back shares up to a market value of 950 euros. This upper limit is more than 40 percent above the current share price and in extreme cases would amount to a volume of almost 48 billion euros. The dimensions of European companies are usually more modest. Unilever plans to spend up to three billion euros on its own shares, Novartis up to 2.5 billion dollars, LOral up to 1.2 billion euros, and the British spirits company Diageo up to a billion pounds.
In Germany, the insurers Allianz and Munich Re are known as hardworking buyers, but are holding back in the Corona crisis so as not to attract the displeasure of the regulatory authorities. Analysts assume that the two DAX companies will be active again by 2022 at the latest. After all, Deutsche Post has planned to buy back its own shares up to a billion euros in the spring.
In the old world, dividends, i.e. cash payments directly to shareholders, are more popular than buybacks. This trend could, however, turn around: The investment bank Morgan Stanley calculates that European companies will in future orient themselves more closely to the American model. The pandemic shock highlighted one of the advantages of buybacks: a cut in dividends causes displeasure among shareholders because the actually firmly planned transfer of money does not materialize. That is why bad news about dividends often weighs down the price. Share buybacks, on the other hand, can be suspended without any obvious disadvantage for the shareholder and are therefore only punished mildly on the stock exchange.
The logic of the stock exchange
The Brsians are convinced that buybacks have many advantages: If shares are withdrawn from circulation, the consolidated profits have to be distributed over fewer securities. So each outstanding share pays a higher proportion of the profit. That should add value to a stock. A prominent proponent of buybacks is Warren Buffett. In his letter to the shareholders of his holding company, he describes the effect: Berkshire bought a little more than a billion Apple shares between 2016 and 2018. At the time, that corresponded to 5.2 percent of the iPhone manufacturer. Since Apple has now sucked a lot of its own shares from the market, Berkshire’s stake has risen to 5.4 percent. And that, although Buffett has sold some Apple shares in the meantime.
In the case of Apple, it’s a company that is doing extremely well. But there are also counterexamples. The situation is particularly blatant with American airlines. In the years before the pandemic, instead of building up reserves, they invested the majority of their cash flows in buying their own shares – and had to be saved from collapse with government aid after the virus broke out.
Another point of criticism: companies usually buy their own shares when business is going well and the papers are correspondingly expensive. If prices fall, buybacks will be suspended. So companies are doing exactly the opposite of what a smart investor would do. Adidas provides a chilling example from Germany: the sporting goods retailer bought its own shares in the rally before the corona crash. The program was then abruptly suspended on March 17 last year: one day before the share hit its low point and the best time to buy had actually come.
For successful buybacks it is important that companies have the financial strength and also the will to make continuous use. The buyback version of the American S&P 500 stock index, which selects the 100 most active buyers from the broad US market, has gained a narrow lead over the past ten years. The balance sheet in Europe is better. The European Buyback Index calculated by Solactive has the broad Stoxx Europe 600 over the past ten yearsren on average by just under four procent points beaten.
Apple also wants to continue buying: the company has increased its program by 90 billion dollars.
In the USA in particular, buybacks are a popular tool for companies to polish up the share price. The index provider S&P has created a special version of its popular S&P 500 stock index. For this product, the 100 companies with the highest repurchase rate are selected from the base index. Investors in Europe can invest in the S&P 500 Buyback via an ETF from Amundi (ISIN: LU 168 104 812 7).
European companies are also relying more on share buybacks. The Solactive European Buyback Index focuses on companies that have announced buybacks in the past two months. The 50 members currently include Carlsberg, freenet and Deutsche Post. The equity fund KBC Equity Fund Buyback Europe (ISIN: BE 017 440 701 6) has relied on this investment theme since the turn of the millennium and has achieved above-average returns. The largest positions recently included Nestl, Siemens and Sanofi.
In just under a decade, Apple has spent $ 550 billion on share buybacks and dividends. The shopping spree should continue. LVMH wants to take up to ten percent of its shares from the market. The luxury goods conglomerate is benefiting from growing prosperity in China and the economic upswing. The consumer goods group Unilever has a comparatively crisis-proof business and can therefore finance buybacks in the long term. With its buybacks, Deutsche Post is sending the signal that the Management Board expects business to develop positively.
More news on freenet AG
Image Sources: Tang Yan Song / Shutterstock.com, Lightspring / Shutterstock.com