Buybacks

In 2023, S&P 500 companies collectively spent over $800 billion buying back their own shares. That's more than the GDP of most countries — returning cash to shareholders not as dividends, but as repurchases. Buybacks are one of the most significant but least understood forces in modern stock markets.

What is a buyback?

A share buyback is when a company uses its own cash to buy shares of itself on the open market — then cancels them. Fewer shares outstanding means each remaining share represents a larger slice of the company.

Why buybacks instead of dividends?

• Flexibility. A dividend, once established, is almost impossible to cut without panicking the market. A buyback programme can be paused quietly.
• Tax efficiency. In many countries, capital gains are taxed at a lower rate than dividends. Buybacks return value through price appreciation rather than income.
• Signal of confidence. Management buying back stock signals they believe the shares are undervalued — putting the company's money where its mouth is.

The criticism

Buybacks are genuinely controversial. Critics argue companies use them to inflate EPS and therefore executive bonuses (often tied to EPS targets) rather than investing in the business or hiring workers. During the pandemic, several US airlines that had spent billions on buybacks then required government bailouts — having no cash cushion left.

There's also the timing problem: buybacks are often done when share prices are high. Many companies bought aggressively in 2021 at peak valuations, sitting on large losses when markets corrected in 2022.

The Apple case study

Apple is the gold standard. Since 2012, Apple has bought back over $600 billion of its own stock — reducing shares outstanding by roughly 40%. Combined with earnings growth, this has compounded into extraordinary long-term EPS growth even in years when revenue growth was modest. When you see Apple's EPS rising faster than its revenues, buybacks are a big part of the explanation.