Some of the world’s biggest companies spend tens of billions of dollars a year buying their own shares. Here’s what a buyback is, why companies do them, and what they mean for shareholders.
When a company makes more money than it needs to run and grow its business, it has a few choices. It can invest in new projects, pay down debt, pay dividends to shareholders, or buy back its own shares.
In a buyback, the company buys some of its shares from investors and usually cancels them. That reduces the total number of shares on issue.
Because the company’s profits are now shared among fewer shares, earnings per share rise, even if total profit stays the same. That can support the share price.
Why companies do buybacks
Companies often prefer buybacks to raising dividends because they are more flexible. Once a company lifts its dividend, investors expect it to stay there. A buyback can be switched on or off depending on how much spare cash there is.
A company may also do a buyback when it believes its shares are undervalued, signalling confidence in its own future.
In the U.S., buybacks are huge. Apple has spent more on buybacks than almost any company in history, often around US$100 billion a year. In Australia, big companies including BHP, the major banks and Woolworths have run large buybacks.
On-market and off-market
An on-market buyback is the simplest. The company buys its shares on the ASX over a period of months, at the market price, just like any other investor.
An off-market buyback is different. The company invites shareholders to offer their shares back, usually at a discount to the market price. Part of the price paid can be treated as a fully franked dividend, which can make it attractive to investors who pay little or no tax, such as retirees and super funds.
The criticism
Critics argue buybacks can boost share prices and executive bonuses in the short term at the expense of long-term investment in staff, research or new projects. If a company buys back shares when the price is high, it can also destroy value for remaining shareholders.
In the U.S., a 1% tax on buybacks was introduced in 2023. Supporters say buybacks are simply an efficient way to return spare cash to the owners of a business, who can then invest it elsewhere.
