What Are Stock Buybacks and Why Do They Matter?
In recent years, stock buybacks have become one of the most common ways companies return value to shareholders. In fact, S&P 500 companies spent over $900 billion on stock buybacks in 2023 alone—a record-breaking amount.
But are stock buybacks always a good thing? Warren Buffett has praised stock repurchases when done right, but he has also warned against companies using buybacks irresponsibly.
For long-term investors, it’s crucial to know how to analyze stock buybacks to determine whether they truly add value—or if they’re masking deeper problems. In this article, we’ll break down:
- What stock buybacks are and how they work
- When buybacks are beneficial for shareholders
- When stock buybacks are a red flag
- Real-world examples of good and bad stock buybacks
- How to evaluate a company’s buyback program before investing
Let’s take a look.
What Are Stock Buybacks?
A stock buyback, also known as a share repurchase, occurs when a company uses its own cash to repurchase shares from the market. This reduces the number of outstanding shares, which can increase earnings per share (EPS) and potentially boost stock prices.
Why Do Companies Buy Back Their Stock?
Companies conduct buybacks for several reasons:
✅ Returning excess cash to shareholders – If a company has surplus cash and limited investment opportunities, a buyback can reward investors.
✅ Boosting earnings per share (EPS) – Fewer outstanding shares mean the same earnings are divided among fewer shareholders, increasing EPS.
✅ Showing confidence – Management may repurchase shares if they believe the stock is undervalued.
✅ Providing an alternative to dividends – Some investors prefer capital appreciation over taxable dividend income.
However, not all buybacks are created equal. Some can be a red flag if done irresponsibly.
The U.S. Securities and Exchange Commission (SEC) regulates how and when companies can repurchase shares. Investors can review the latest SEC Rules on Share Buybacks to understand corporate disclosure requirements and potential regulatory concerns.
When Are Stock Buybacks Beneficial? (Good Examples)
1. Apple (AAPL) – A Model Buyback Strategy
Apple is one of the largest stock repurchasers in history. Since launching its buyback program in 2012, Apple has repurchased over $600 billion in shares.
✅ Why It Worked:
- Apple generates strong cash flow, allowing it to fund buybacks without taking on excessive debt.
- It continues to invest in growth while repurchasing shares, maintaining innovation in iPhones, Macs, and services.
- Buybacks are done strategically when the stock is fairly valued or undervalued.
Apple’s disciplined approach shows that buybacks can be a powerful tool for long-term investors when done responsibly.
2. Berkshire Hathaway (BRK.A, BRK.B) – Warren Buffett’s Buyback Philosophy
Warren Buffett only repurchases Berkshire Hathaway shares when he believes they are undervalued compared to intrinsic value.
Warren Buffett has consistently emphasized that buybacks should only be executed when shares are trading below intrinsic value. In his annual shareholder letters, Buffett explains his buyback criteria and why repurchases should be done for the right reasons
✅ Why It Worked:
- Buffett sets clear rules for buybacks, ensuring shareholders benefit.
- He avoids buybacks when stock prices are overvalued.
- Berkshire’s balance sheet remains strong, with no reckless borrowing to fund buybacks.
💡 Lesson from Buffett: Only buy back stock when it makes sense based on intrinsic value—not just to artificially boost EPS.
3. Microsoft (MSFT) – Balancing Growth & Buybacks
Microsoft regularly repurchases shares while maintaining heavy investment in AI, cloud computing, and software.
✅ Why It Worked:
- Microsoft generates high free cash flow, supporting buybacks without harming growth.
- It doesn’t sacrifice innovation or R&D for buybacks.
- Buybacks are a tax-efficient way to return capital to shareholders.
When Are Stock Buybacks a Red Flag? (Bad Examples)
1. General Electric (GE) – Buybacks Before a Collapse
During the early 2000s, GE spent billions on stock buybacks—but instead of strengthening the company, it left it vulnerable when financial troubles hit.
🚩 Why It Was a Red Flag:
- GE borrowed money to fund buybacks instead of using excess cash.
- The company neglected core business investments, leading to long-term struggles.
- The stock plummeted, wiping out the benefits of buybacks.
2. IBM (IBM) – Buybacks at the Expense of Growth
IBM spent over $125 billion on stock buybacks between 1995 and 2014, yet its stock price remained stagnant for years.
🚩 Why It Was a Red Flag:
- IBM cut R&D spending to fund repurchases, limiting innovation.
- Buybacks boosted short-term earnings but didn’t improve the business.
- The company lost its competitive edge in cloud computing.
3. Boeing (BA) – Buybacks Over Safety
Boeing repurchased over $43 billion in stock from 2013-2019. However, it faced severe financial stress after the 737 Max crisis.
🚩 Why It Was a Red Flag:
- Boeing prioritized share buybacks over safety improvements.
- When the crisis hit, the company had little cash buffer and had to seek government aid.
- The stock price collapsed, making buybacks look like a wasted opportunity.
How to Analyze a Company’s Stock Buyback Program
💡 Before investing, ask these key questions:
1️⃣ Does the company have strong cash flow?
- Check if buybacks are funded by profits—not by debt.
2️⃣ Is the company still investing in growth?
- Avoid companies that cut R&D or innovation to fund buybacks.
3️⃣ Are buybacks done when the stock is undervalued?
- Compare buyback timing to the company’s intrinsic value (Read: What Is Margin of Safety?).
4️⃣ Is the company using buybacks to artificially inflate EPS?
- Look for companies with stagnant revenue but rising EPS—this can be a red flag.
5️⃣ Does the company have too much debt?
- If a company borrows heavily to fund buybacks, it can be risky. (Read: Stock Fundamentals Guide).
In 2023, S&P 500 companies spent over $900 billion on stock buybacks, making it one of the largest years for repurchases in history. Investors can explore historical data on stock buybacks to see trends over time and how different market conditions impact buyback activity
Final Thoughts: Stock Buybacks Can Be Great—If Done Right
Stock buybacks can be a powerful tool for returning value to shareholders—but only when done responsibly.
✅ Good buybacks occur when a company has strong cash flow, invests in growth, and repurchases shares at undervalued prices.
🚩 Bad buybacks happen when companies borrow excessively, neglect R&D, or use buybacks to mask poor business performance.
As a long-term investor, always analyze a company’s buyback history and financial health before making a decision.
Some investors prefer buybacks over dividends because they can be a more tax-efficient way to return capital. However, others argue that dividends provide more certainty. To explore both perspectives, read this breakdown of whether stock buybacks are better than dividends.
Happy Investing!