Mercedes-Benz will begin buying back up to €1 billion ($1.2 billion) of its own shares this week, extending an aggressive capital-return programme as the German luxury carmaker contends with weakening sales in China, intense competition and a sharp deterioration in automotive margins.
The company’s supervisory board approved the latest programme, which starts on Tuesday, Sept. 1, and is scheduled to run through April 6, Mercedes said on Monday. All shares repurchased under the programme will be cancelled.
The move formalizes a plan Mercedes outlined when it reported second-quarter results in July. It follows a separate €2 billion buyback completed earlier this year, taking the potential value of repurchases announced or completed in the current programme to €3 billion.
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Mercedes shares were little changed in early Frankfurt trading on Monday but have lost more than a fifth of their value this year as investors reassess the outlook for Europe’s premium auto industry.
The buyback comes at a difficult point for the company. Mercedes is attempting to maintain shareholder distributions while directing significant capital towards electric vehicles, software and new models, all while facing weaker demand in China and growing competition from Chinese manufacturers.
The company’s cars division reported an adjusted return on sales of just 4% in the second quarter, far below the level Mercedes has targeted for the business. The figure highlights the pressure on profitability as pricing becomes more competitive and the costs of developing and launching new vehicles remain high.
Chief Executive Officer Ola Källenius has responded with a cost-cutting programme and reductions in production capacity while pushing a new product cycle designed to revive demand. The strategy includes the new CLA sedan and an electric version of the GLC sport utility vehicle.
The success of that product offensive will matter greatly in China, Mercedes’ largest market outside Europe and one of the most competitive battlegrounds for premium vehicles. Chinese consumers have increasingly embraced domestic brands, particularly in electric vehicles, where local manufacturers have built advantages in battery technology, software and connected-car features.
That has put traditional luxury manufacturers such as Mercedes, BMW and Volkswagen’s premium brands under pressure to defend market share without resorting to heavy discounting that would further erode margins.
The development has therefore made the challenge twofold for Mercedes: restore sales growth while protecting profitability during an expensive technological transition. The buyback offers shareholders a direct return at a time when the company’s stock has performed poorly, while cancelling the repurchased shares will reduce the number of shares outstanding and potentially increase earnings per share for remaining investors. But the programme does not address the underlying operating pressures confronting the automaker.
That has become necessary because investors have become increasingly focused on whether European carmakers can generate attractive returns on the billions of euros being committed to electrification and software. Mercedes has sought to balance that investment with disciplined capital allocation. The company has been cutting costs and trimming capacity as it attempts to adapt production to weaker demand rather than maintaining excess manufacturing capacity.
The strategy also reflects a broader shift across the European auto industry, where manufacturers are being forced to reconcile ambitious electric-vehicle investment plans with slower-than-expected EV adoption, pricing pressure and competition from Chinese brands.
The latest buyback could provide some support for Mercedes’ share price, but sustained rerating will depend on an improvement in the company’s underlying earnings. Investors will be watching whether the new CLA and electric GLC can generate sufficient demand, whether cost reductions can lift margins and whether Mercedes can stabilize its position in China.
The buyback will be conducted through an independent bank and may be suspended during separate employee share-purchase programmes expected in November and March, Mercedes said.
The programme ultimately places a greater burden on the company’s operating strategy to deliver results. With the shares already down more than 20% this year and the cars division generating a 4% adjusted return on sales, investors are expected to judge Mercedes less by the size of its capital returns than by its ability to turn its product and cost-cutting strategy into stronger cash generation and more resilient margins.