Stock Buyback
A stock buyback, or share repurchase, is when a company uses its own cash to buy back its shares, reducing the number outstanding.
In a stock buyback, a company buys its own shares, usually on the open market over a period of months or years. The repurchased shares are typically retired or held as treasury stock, so fewer shares remain in the hands of investors.
With fewer shares outstanding, each remaining share represents a slightly larger piece of the company, and earnings per share rise even if total profit stays the same. Buybacks are therefore one way to return cash to shareholders, alongside dividends. Unlike dividends, they do not create an immediate taxable payment for shareholders who do not sell.
Companies often say buybacks signal that management sees the stock as undervalued. Critics argue that buybacks can be poorly timed, made at high prices, or used mainly to offset dilution from employee stock awards. In the US, a federal excise tax applies to net share repurchases by many public companies.
Example: a company earns $1 billion and has 500 million shares, so EPS is $2. If it buys back 50 million shares and profit stays the same, EPS rises to about $2.22.