13.08.2018 - Studies

Buybacks are in vogue

by Philipp Immenkötter

Share buybacks are heading towards a new 10-year record. In 2018, 4.8 billion euros were used by the DAX and MDAX for stock buybacks; a further 5.7 billion euros have already been announced. Low interest rates, large cash holdings and low P/E ratios make buybacks appear more attractive.

When a company buys its own shares on the capital market, it uses liquidity to reduce the number of shares outstanding. It exchanges cash for a higher share price. The problem with this is that buybacks do not create any additional economic value. Liquid funds are spent, but no new assets are acquired for this purpose. The investor has only become richer on paper and does not have more cash in their pockets which they could reinvest, as is the case with a dividend.

It is therefore not surprising that share buybacks are more of a last resort. Only when no further investment opportunities and acquisitions arise; or the dividend is not increased in the short term; or there is no reason for early debt repayment and no excessive liquidity buffer is needed, do companies resort to the measure and buy back their own shares.

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