Why Do Companies Buy Back Shares?
EPS accretion: If net income stays constant but shares outstanding decrease, EPS rises. Example: $100M profit / 10M shares = $10 EPS → reduced to 8M shares = $12.50 EPS.
Return of excess cash: Mature companies with limited growth opportunities return idle cash to shareholders via buybacks or dividends. Apple, Microsoft and large S&P 500 companies collectively repurchase hundreds of billions of dollars annually.
If management believes the stock is trading below intrinsic value, buybacks may represent the highest-return "investment" available.
Buybacks vs Dividends
Dividends are cash distributions taxed as income. Buybacks are generally more tax-efficient — shareholders pay capital gains tax only if and when they sell.
Dividends create ongoing expectations; cutting them sends a very negative signal. Buyback programs are flexible and can be paused without the same stigma.
Criticisms of Buybacks
Critics argue buybacks prioritize short-term EPS over long-term investment in R&D, employees, and infrastructure. Debt-financed buybacks weaken balance sheets.
When executive share sales coincide with buyback periods, it raises concerns about insiders benefiting at shareholders' expense.