STOCK BUYBACKS & SHARE REPURCHASES
Plain English
A stock buyback is when a company uses its cash to buy back its own shares from the market. This reduces the total shares outstanding — which increases earnings per share (EPS) and often the stock price. Buybacks are how many companies return cash to shareholders without paying a dividend. But they're not always a good sign.
Going deeper
Share repurchases (buybacks) reduce the number of shares outstanding, which mechanically increases EPS even if total earnings are flat. Example: 100M shares, $100M earnings = $1.00 EPS. After repurchasing 10M shares (90M outstanding): $100M / 90M = $1.11 EPS — an 11% increase with no revenue or profit growth. The S&P 500 has returned $5+ trillion to shareholders via buybacks over the past decade. Buybacks can be more tax-efficient than dividends (no immediate taxable event for shareholders). However, buybacks are not always good capital allocation: companies that buy back stock at inflated prices destroy shareholder value. Companies that borrow money to fund buybacks while growth would benefit from investment are controversial. The buyback yield (buyback amount / market cap) measures how much a company is reducing its share count annually — a 3%+ buyback yield is significant.
Examples
Apple's Buyback Machine
Apple has repurchased over $700 billion of its own stock since 2012. In 2012, Apple had 6.6 billion shares. By 2024, it had reduced this to ~15.2 billion (post-split equivalent). This massive share reduction has been one of the key drivers of EPS growth alongside earnings growth — even in years with limited revenue growth.
The Bad Buyback
A company borrows $500M at 8% to repurchase shares when the stock trades at a 35x P/E ratio. The return on buying their own overpriced stock is far less than 8% — they're destroying value. Meanwhile, the business needed that capital to invest in R&D. Buybacks at high valuations can hurt long-term shareholders.