Video Lesson
Prefer watching? This video covers the key concepts from this article.
What Is a Stock Buyback?
A stock buyback (share repurchase) is when a company uses cash to buy its own shares on the open market. By reducing the number of shares outstanding, each remaining share represents a larger ownership stake. S&P 500 companies collectively spend hundreds of billions on buybacks every year.
How Buybacks Benefit Shareholders
- Earnings per share (EPS) rises as shares are retired
- More tax-efficient than dividends — shareholders choose when to realize gains
- Signals management confidence that shares are undervalued
- Returns surplus cash without committing to a permanent dividend increase
When Buybacks Are Good vs Bad
Value-creating: Shares are genuinely undervalued and the company has strong free cash flow with no better uses for the capital.
Value-destroying: Buying back shares at inflated prices, or taking on debt to fund repurchases while cutting R&D and employee investment.
Buybacks vs Dividends
Both return cash to shareholders. Dividends provide a reliable income stream but create tax consequences annually and set ongoing expectations. Buybacks are more flexible, let investors choose their own tax timing, and can be scaled back without the same market signal that a dividend cut sends.
How to Evaluate a Buyback Program
Ask: Is the stock cheap relative to intrinsic value? Is the company funding this from genuine free cash flow? Companies that consistently repurchase shares below fair value — like Berkshire Hathaway has historically — create significant long-term shareholder value.