A share buyback (also known as a stock repurchase) occurs when a company purchases its own shares from the open market or directly from shareholders. The result? Fewer shares remain in circulation.

This reduction in the number of outstanding shares can have flow-on effects for existing shareholders, from boosting earnings per share (EPS) to potentially nudging the share price higher.

But not everyone’s a fan. Critics argue that buybacks can be short-term sugar hits, favouring shareholders over long-term investment in growth or employees.

Before we dive into the pros, cons, and real-life examples, let’s start with the basics.

How share buybacks work

When a company wants to execute a buyback, it typically announces a program specifying how many shares it intends to repurchase and over what timeframe. It can then:

• Buy shares on the open market, like any other investor
• Make a tender offer, asking shareholders to sell at a specific price
• Use a Dutch auction, where investors indicate how many shares they're willing to sell at various prices

Once repurchased, the company usually cancels the shares, which reduces the total number of shares outstanding. This doesn’t change the company’s overall value, but it does mean that remaining shareholders own a slightly larger slice of the pie.

So why would a company do this in the first place?

Boost the share price

One of the most talked-about reasons for a buyback is to help lift the company’s share price.

With fewer shares in circulation, metrics like earnings per share (EPS) and return on equity (ROE) improve – at least mathematically. Higher EPS can make a stock more attractive to investors, especially those who rely on financial ratios like the (P/E) ratio for decision-making. This boost in perceived performance can drive demand and, in turn, the share price.

Of course, this isn’t a guarantee. If the market views the buyback as artificial window dressing (rather than underpinned by strong fundamentals), the price may not respond at all, or could even drop.

Signal confidence

Buybacks can be a powerful signal from management that they believe their stock is undervalued.

When insiders use company funds to buy back shares, it can send a strong signal: they’re choosing this over acquisitions or higher dividends. To many investors, that’s a bullish sign. The message is: “We believe in our future and think our stock is a bargain.”

This signalling effect can appeal to long-term investors looking for companies with conviction in their strategy and balance sheet.

Manage capital structure

Another reason companies buy back shares is to optimise their capital structure – that is, the mix of debt and equity on their balance sheet. By reducing the number of outstanding shares, companies can shift their financing mix toward debt, which is often cheaper due to tax advantages like interest deductibility.

This approach can help lower a company’s overall cost of capital and make it more financially efficient, provided it doesn't over-leverage itself in the process.

Offset dilution

Many companies issue new shares over time, often to compensate employees via stock options or share-based incentive plans. This increases the total number of shares outstanding and can dilute existing shareholders' stakes.

To counteract this, companies sometimes use buybacks to “mop up” those extra shares. This allows them to reward staff without significantly diluting the ownership of other investors.

From an investor’s perspective, this can be reassuring – especially in industries like tech, where equity compensation is common.

Provide a flexible use of excess cash

Buybacks offer companies a relatively flexible and non-permanent way to return excess capital to shareholders.

Unlike dividends – which, once increased, are often expected to stay that way – buybacks can be adjusted or paused as needed. This gives companies more leeway to respond to changing market conditions or investment opportunities.

In that sense, buybacks can be seen as a middle ground: a way to reward shareholders without locking the company into a long-term cash commitment.

What critics have to say about share buybacks

Despite their popularity, share buybacks aren’t without controversy.

Some critics argue that buybacks prioritise short-term shareholder returns over long-term investment. Instead of reinvesting in innovation, infrastructure, or employees, companies may funnel cash into buybacks to inflate financial metrics and please Wall Street .

Others highlight timing issues. Companies often buy back shares when prices are high, effectively overpaying for their own stock and destroying shareholder value. And when recessions hit ? Buybacks often dry up, leaving companies more exposed.

There’s also a governance concern. Executives with performance bonuses tied to EPS or share price may be incentivised to push buybacks for personal gain, rather than in the best interest of the company.

Real-life examples of share buybacks

Apple Inc.

Apple is one of the most prominent – and consistent – practitioners of share buybacks in corporate history.

In 2012, the company launched its first buyback program. Over the years, it has spent more than US$600 billion buying back its own stock – far more than any other company globally.

Why? Apple generates huge amounts of free cashflow and has relatively few options for major acquisitions. Buybacks allow it to return capital to shareholders without committing to higher dividends. The reduced share count has helped boost its EPS and support long-term share price growth.

For investors, the result has been strong capital returns – both via price appreciation and dividends.

Commonwealth Bank of Australia (CBA)

Back in 2021, CBA announced a $6 billion off-market share buyback, one of the largest in Australian history.

The move followed strong financial results and a solid capital position. CBA’s rationale was simple: the bank had excess capital and wanted to return it to shareholders in a tax-effective way. The off-market structure even allowed shareholders to benefit from franking credits .

Following the buyback, CBA’s earnings per share improved due to the reduced share count, and the stock price remained well-supported. Investors appreciated the disciplined capital management, particularly during a time of economic uncertainty.

The bottom line

Share buybacks can be a powerful capital management tool. Used wisely, they can boost shareholder returns, signal confidence, and improve financial ratios. But they’re not a silver bullet. Their impact depends on timing, motivation, and execution.

As with any investing topic, it pays to look beneath the headlines. Is the buyback being done because the company genuinely believes its stock is undervalued, or to paper over a lack of growth options? Does it come at the expense of future investment? Is the business in a strong enough position to return capital?

At Pearler, we believe long-term investing is about understanding the full picture. Whether you’re reviewing a company’s buyback or its broader strategy, ask yourself: does this move align with my goals and risk tolerance ?

Happy investing!