Buyback
Corporate FinanceDefinition
A company purchases its own shares from the open market, reducing share count. Mathematically increases earnings per share and ownership stake of remaining shareholders. Has eclipsed dividends as the primary US corporate-payout method since ~2010.
Pros: tax-efficient (no dividend taxation), flexible (can pause without signaling distress), aligns with stock-based compensation. Cons: managers buy high (peak buybacks always coincide with peak markets), and debt-funded buybacks at frothy valuations destroy long-term value (e.g., GE pre-2018, Boeing pre-2020).
Pros: tax-efficient (no dividend taxation), flexible (can pause without signaling distress), aligns with stock-based compensation. Cons: managers buy high (peak buybacks always coincide with peak markets), and debt-funded buybacks at frothy valuations destroy long-term value (e.g., GE pre-2018, Boeing pre-2020).
Example
Apple has spent over $700B on buybacks since 2012 — single largest buyer of its own stock. Share count fell from 26B to 15B. EPS got mechanical lift on top of organic earnings growth.