What Is a Stock Buyback?
A stock buyback is when a company uses its own cash to buy its shares back from the market. Fewer shares are left, so each remaining share owns a bigger slice of the company.
How a buyback helps owners
A company has 100 shares and earns $100, so $1 per share. It buys back 10 shares. Now the same $100 profit is split over 90 shares: about $1.11 each. Earnings per share went up without the business growing.
Why companies do buybacks
When a company makes more cash than it needs, it can pay a dividend or buy back shares. Buybacks are flexible and, in the US, can be more tax-friendly for owners than dividends.
When buybacks are bad
- When the company overpays for its own shares.
- When it borrows money to buy back shares and adds risky debt.
- When buybacks only cancel out new shares handed to staff, so the share count does not really fall.
See it in real companies
Open a company to see what it sells and how it makes money.
Related terms
EPSThe profit one share earned.
DividendCash a company pays its owners.
Free cash flowReal cash left after running and growing the business.
ShareholderAnyone who owns at least one share.
Payout ratioHow much of its profit a company pays as dividends.
DebtMoney a company has borrowed and must pay back.