Companies buy back stock to return cash to shareholders, boost earnings per share, and signal confidence.
Reasons
- Return cash to shareholders.
- Boost earnings per share (EPS) by cutting shares.
- Signal that management believes shares are undervalued.
- Offset stock compensation dilution.
Scale
US companies announced about $1 trillion of buybacks in 2023.
Tax
A 1% excise tax on buybacks started in 2023.
Criticism
Some say they favor short term gains over investment.
Return of cash
A buyback (share repurchase) is when a company uses cash to buy its own shares from the market. It reduces the number of shares outstanding, which increases earnings per share and each remaining shareholder’s ownership percentage.
Reasons
- Return capital to shareholders without a permanent dividend commitment.
- Signal that management believes shares are undervalued.
- Offset dilution from employee stock compensation.
- Improve per share metrics like earnings per share and return on equity.
- Use excess cash when no better investments are available.
Scale
S&P 500 companies repurchased about 795 billion dollars of stock in 2023, according to S&P Dow Jones Indices. Record buybacks of 923 billion dollars were reached in 2022. Apple has repurchased over 600 billion dollars of stock since 2012.
Tax
Since January 1, 2023, the Inflation Reduction Act imposes a 1% excise tax on net stock repurchases by public companies. Buybacks are generally more tax efficient than dividends for shareholders, because they defer taxes until selling shares.
Rules
SEC Rule 10b-18 provides a safe harbor for repurchases, and the SEC requires more disclosure of buyback activity.
Criticism
- Critics say buybacks can boost share prices short term and executive pay tied to earnings per share, at the expense of investment in workers, research and growth. Economists like William Lazonick have argued this.
- Companies may buy back shares at high prices.
- Debt funded buybacks increase financial risk.
Defenders
Supporters say buybacks return capital to investors who can reinvest it elsewhere, and are flexible.
Evidence
Studies show mixed results on whether buybacks create long-term value.
Numbers and rules
US companies announced about 790 billion USD in stock buybacks in 2023, according to S&P Dow Jones Indices, close to the record 922 billion USD in 2022. A buyback shrinks the share count, which raises earnings per share even if profit is unchanged. Since January 2023, a 1 percent excise tax applies to net repurchases of US public companies under the Inflation Reduction Act.
Arguments on both sides
Supporters say buybacks return excess cash flexibly and signal management belief that shares are undervalued. Critics say they can divert funds from investment, wages or research, and can boost executive pay tied to EPS. Research shows mixed effects. Companies must report repurchases in SEC filings, and Rule 10b-18 offers a safe harbor for execution.
Based on data from S&P Dow Jones Indices and the US Securities and Exchange Commission
