What is Share buyback?
Aksiyalarni qaytarib sotib olish (buyback)
In short
A company buys its own shares on the market, reducing the share count — each remaining share gets more profit (EPS).
Also known as: repurchase
A buyback (share repurchase) is when a company buys its own shares on the market, reducing the number of shares outstanding. Each remaining share then gets a bigger slice of the profit: EPS rises even if profit does not change.
Why companies do it
- To return surplus cash to shareholders — an alternative to dividends.
- Because management thinks the stock is cheap.
- To offset the dilution caused by shares issued to employees.
When it is good, when it is bad
A buyback creates value when the stock is below its true worth and it is funded from free cash flow. Buybacks done when the stock is expensive, or funded with debt, can waste shareholders' money. Also, an announced program ("up to $10 billion") is an authorisation, not an obligation; check the cash flow statement to see how much was actually bought.
What to check
Is the share count actually falling? If a company does large buybacks every year but the share count stays flat, the buyback is mostly soaking up new shares issued to employees. The US has also introduced a separate tax on buybacks, which makes them somewhat more expensive.
Net income is $20m in all four cases. When the share count shrinks (buyback) EPS rises; when it grows (dilution) each share gets less profit.
Example
A hypothetical company: net income $100 million, 50 million shares → EPS $2.00.
It buys back 10% of the shares — 5 million — at $40. Cost: 5M × $40 = $200 million.
Now there are 45 million shares and profit is unchanged: EPS = $100M ÷ 45M ≈ $2.22 — about 11% higher with no profit growth.
But if 3 million new shares were issued to employees in the same year, the count is 50 − 5 + 3 = 48 million and EPS = $100M ÷ 48M ≈ $2.08. Despite spending $200 million, the net share count fell only 4%.
Mistakes and tips
Look at the actual change in share count, not the size of the announced program.
Separate how much of EPS growth comes from profit growth and how much from buybacks.
Debt-funded buybacks weaken the balance sheet — watch the debt-to-equity trend.
Frequently asked questions
- Do buybacks increase the stock price?
- There is no direct guarantee. They raise EPS and add a buyer to the market, but the price still depends on business results and market sentiment.
- Are buybacks better than dividends?
- Economically both return cash to shareholders. Dividends pay cash, while buybacks increase the stake of the remaining holders; which is better depends on the price paid and the tax situation.
Learn it in the Academy
This term is covered with hands-on examples and a quiz in these lessons of the interactive course.
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