Many well-known companies, including Apple, buy back their own shares to return cash to shareholders and reduce the number of shares outstanding.
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When a company is sitting on excess cash, it has several choices besides keeping the money on ice. It can pay down debt, invest in the business, pay dividends, or buy back shares of its stock. Stock buybacks can be controversial. Supporters see them as a way to return capital to shareholders and potentially increase share value, while critics argue that they can be used to influence a companyâs stock price.
The practice became commonplace after 1982, when the Securities and Exchange Commission adopted Rule 10b-18, which gave companies a safe harbor from liability for market manipulation when repurchasing their shares under certain conditions.
Key Points
- Stock buybacks reduce the number of shares outstanding, which can increase earnings per share (EPS) and potentially boost share value.
- Buybacks can return capital to shareholders without committing a company to ongoing dividend payments.
- Critics argue that buybacks can inflate financial metrics, mask stock dilution, or divert money from investments that could support long-term growth.
Whether a buyback benefits shareholders depends on why a company is repurchasing its stock, how much it pays for the shares, and what else it could have done with the money.
A stock buyback, also called a share repurchase, is a corporate finance strategy in which a company buys its own stock from the market, reducing the number of outstanding shares. Each remaining share then represents a slightly larger ownership stake in the company.
Why would a company buy back its shares?
Companies buy back their shares for several reasons:
- Boost EPS. By reducing the number of shares outstanding, buybacks can increase a companyâs earnings per share (EPS), a key metric investors use to evaluate a stock.
- Signal undervaluation. A buyback can signal that management believes the companyâs shares are undervalued and that repurchasing them is a good use of capital.
- Tax efficiency. Unlike dividends, which generally create taxable income for shareholders who receive them, buybacks donât create an immediate tax liability for shareholders who keep their shares. Investors who sell shares may owe capital gains tax. Companies generally pay a 1% excise tax on stock repurchases under a provision of the Inflation Reduction Act of 2022.
- More flexibility than dividends. Companies can scale back or suspend share repurchases without necessarily sending the same negative signal as a dividend cut. Investors often expect regular dividends to continue, while buybacks generally donât carry the same expectation of recurring payments.
- Reduce dilution. Stock-based compensation can increase the number of shares outstanding and dilute existing shareholdersâ ownership. Buybacks can offset some or all of that increase.
Why are stock buybacks controversial?
The controversy over buybacks often comes down to how companies use their money and whether repurchasing shares benefits shareholders at the expense of other priorities:
- Higher EPS without higher earnings. Buybacks can increase EPS simply by reducing the number of shares outstanding, even if a companyâs earnings havenât grown. That can make some measures of financial performance look stronger and potentially influence how Wall Street values the stock.
- Higher debt levels. Some companies borrow money to finance buybacks. Taking on additional debt increases a companyâs financial obligations and can make it more vulnerable during an economic downturn or a period of declining earnings.
- Missed investment opportunities. Critics argue that companies should use excess cash to invest in growth, such as new infrastructure, research and development, or new technologies, rather than return the money to shareholders through buybacks.
- Income inequality. Critics argue that buybacks disproportionately benefit shareholders and executives who own company stock and that companies could instead direct more of their resources toward wages or other investments in workers.
- Mask stock dilution. Companies may use buybacks to offset shares issued as compensation, making the dilution caused by stock-based compensation less apparent to investors.
How stock buybacks affect valuation
Buybacks can affect how investors value stocks. Repurchasing shares uses cash, and companies sometimes borrow money to finance buybacks. Those changes to a companyâs capital structure can affect its riskâand the return investors expect for taking on that risk.
One way to think about that relationship is through the capital asset pricing model (CAPM), which estimates an investmentâs expected return based in part on its beta, a measure of how much its returns tend to move relative to the overall market.
Riskier investments generally need to offer higher expected returns to attract investors. Suppose a money market fund and a high-risk stock both offered an expected annual return of 3%. Why take on the additional risk of the stock for the same expected return?
Companies with the biggest stock buybacks (2016â2025)
Figures represent the value of share repurchases reported by companies for fiscal years 2016â2025, based on company filings.
Buyback authorizations keep getting bigger. In September 2026, NVIDIA (NVDA) added a record $150 billion to its share repurchase authorization just four months after adding $80 billion to its program.
Stock buybacks are one way companies can put excess cash to work and return capital to shareholders. Whether a buyback creates value depends on factors such as the price the company pays for its shares, how the repurchase affects its balance sheet, and what other uses the company has for the money.
For investors, thatâs the important question: Is repurchasing shares a better use of the companyâs capital than paying down debt, investing in the business, making acquisitions, or paying dividends?
This article was most recently revised and updated by Karl MontevirgenThis article was most recently revised and updated by David Schepp
