Sometimes, the headlines celebrate what investors should be questioning...
Say a company announces a multibillion-dollar share-repurchase program... the stock pops 4% in morning trading... and the financial media praises management for "returning capital to shareholders."
It sounds like an open-and-shut win for individual investors. After all, their slice of the pie gets bigger when a business buys back its own shares.
But as we'll explain shortly, not all buybacks are created equal.
Share buybacks have become the corporate world's favorite tool for boosting stock prices – and for good reason. When executed correctly, they're an exceptionally tax-efficient way to compound shareholder wealth over long periods.
They've even become more popular than dividends as a strategy for sending cash back to shareholders.
The chart below shows the total amount that nearly 3,500 U.S. companies have spent on buybacks and dividends over the years. As you can see, these businesses have increasingly returned more cash to shareholders through net buybacks...
You can also see that buybacks have been more volatile than dividend payments. And they have recently leveled off, as many companies have decided to put their cash toward AI investments.
The problem with buybacks, however, is that most management teams stink at timing. The strategy can also be little more than a financial sleight of hand to mask stagnant growth, enrich executives, or waste precious corporate capital.
To understand what I mean, let's talk about the math for buybacks.
When a company buys its own stock on the open market and retires those shares, the total number of outstanding shares decreases. Because total net income is now divided among fewer shares, earnings per share ("EPS") goes up – even if the total business profit didn't grow by a single dime.
Because many Wall Street valuation metrics rely heavily on EPS, a higher EPS can drive up the stock price. On paper, everyone wins... Remaining shareholders own a larger percentage of the business, and the stock looks more productive.
Unfortunately, many corporate management teams use buybacks as a cosmetic fix rather than a genuine capital-allocation strategy. Here are the three most common ways repurchases mislead investors...
First, many modern corporations hand out massive stock-based compensation packages to executives and employees. They then often turn around and buy back their own shares on the open market to offset the resulting dilution.
Some of these multibillion-dollar buyback programs do little more than cancel out the new shares issued to employees. For example, a Harvard Law School analysis of selected Fortune 100 companies found that nearly 37% of repurchased shares over the study period offset dilution from equity compensation. That's a significant amount.
Second, many firms intentionally borrowed money to buy back stock when interest rates were very low. While this turbocharged EPS in the short term, it left those companies with heavy debt loads that became more difficult to manage as interest rates rose.
Finally, like I mentioned earlier, corporate managers are notoriously terrible market timers.
Companies routinely launch aggressive buyback programs during economic booms when cash is flowing in and their stocks are trading at all-time highs. But when the market crashes and their stocks become genuinely cheap, they halt buybacks to preserve cash.
Buying high and halting low is a classic recipe for capital destruction, yet boards do it every day. As an example, look at quarterly S&P 500 Index buybacks from 2007 through 2011...
Buybacks peaked the same quarter stocks did. And then after the housing market collapsed and the great financial crisis roiled markets, they bottomed the same quarter as stocks, too.
So how do you make sure the companies in your portfolio are running legitimate, wealth-building repurchase programs? Look for these three green flags...
- Declining Net Share Count: Don't just look at the total dollar amount spent on buybacks. Look at the shares outstanding over the past few years. If that number isn't steadily trending downward year over year, the buybacks are merely offsetting dilution.
- Funded by Organic Free Cash Flow: A healthy buyback is paid for out of surplus cash left over after the company has fully funded its operational needs, research, and growth initiatives. Ideally, free cash flow should cover both dividends and buybacks.
- Price Sensitivity: The best management teams operate like disciplined investors. They step up repurchases when the market unfairly punishes their shares, and they pull back when the stock becomes overvalued, opting instead to hoard cash or pay down debt.
As an example of a good management team, look at FactSet Research Systems (FDS). This is a software company that my team and I love.
FactSet shares got expensive at the end of 2021, trading for more than 40 times earnings. So management decided to cool its buybacks for the quarter. And when the stock became cheap earlier this year, thanks to the software sell-off, management decided to repurchase a lot of stock. Take a look...
FactSet's shares outstanding have also fallen from 38 million in fiscal 2022 to 35.3 million at the end of August... all while total debt has dropped 31%.
That tells us we're dealing with a good management team that knows how to use share repurchases effectively.
In the end, a share-buyback program is neither inherently good nor bad – it's simply a tool.
When an intelligent management team buys back undervalued stock using excess cash, it can be a powerful way to compound wealth. But when share repurchases are used to offset dilution or artificially inflate short-term earnings metrics, you have to pay attention.
The key is knowing which companies are actually building wealth for their shareholders and which ones are just trying to score positive headlines.
In my Retirement Millionaire newsletter, my team and I do all the work for you...
We extensively research to find the highest-quality businesses out there. We look beyond the headlines and surface-level numbers to identify the companies with the biggest potential to build your wealth in the long term.
That way, you don't have to sift through the noise yourself. You can leave it to us to separate the companies using buybacks to create real value from those simply dressing up their financials.
To take some of the stress out of your investing, click here to learn more about my Retirement Millionaire service.
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Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
October 28, 2026