Ever get that rush of excitement?
You see a headline: “Your Favorite Company Announces $10 BILLION Stock Buyback!” 🚀
You think, “Yes! They’re buying their own stock, that must mean the price is going up. This is great for me!”
But hold on.
This is one of the biggest myths on Wall Street. A buyback sounds like a good thing, but it’s often a magic trick designed to look good while doing nothing for you,or even worse, destroying value.
Let’s pull back the curtain.
The “Bigger Slice” Illusion
The main reason companies say they do buybacks is to boost “Earnings Per Share” (EPS).
Think of it this way: A company’s profit is a pizza. The number of shares is the number of slices.
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Before: $100 profit / 100 shares = $1.00 EPS (100 small slices)
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After Buyback: $100 profit / 90 shares = $1.11 EPS (90 bigger slices)
Did the company make more money? No. Did the pizza get bigger? No.
They just used money to reduce the slice count, making your slice look bigger. This is a mathematical trick, not real business growth. But it often makes executive bonuses (tied to EPS) go up.
When Buybacks are BAD 👎
A buyback is just a company spending money. The question is, are they spending it wisely? Often, the answer is no.
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They Buy High 📉Companies are terrible at timing the market. They feel richest when their stock price is at an all-time high, so that’s when they buy. In 2021, Meta (Facebook) spent over $44 billion buying back its stock at prices near its peak. The stock then crashed over 70% in 2022. They basically lit billions of shareholder dollars on fire.
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They Go Into Debt 💳Worse than buying high? Borrowing money to buy high. Some companies take on billions in debt just to buy back stock. This adds massive risk. It’s like taking out a loan to buy yourself a present. If a recession hits, that debt could sink the company.
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They’re Hiding Executive Pay 🤫Many companies use buybacks just to soak up all the new shares they issue to their executives as stock options. The buyback doesn’t even reduce the total number of shares, it just keeps it flat. You, the shareholder, get nothing, while insiders get paid.
When Buybacks are GOOD 👍
To be fair, buybacks aren’t always bad. They can be a great sign, but only under two specific conditions:
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The Stock is Genuinely Cheap 💰When a company’s stock is undervalued (like during a market crash), a buyback is a brilliant move. The company is basically saying, “Our own stock is the best, cheapest investment we can find right now.” This creates real value.
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They Have WAY Too Much Cash 🏦If a company (like Apple, for example) is sitting on a mountain of cash and has already funded all its research, paid its employees well, and can’t find any smart companies to buy, what should it do? Giving that excess cash back to shareholders via a buyback is a responsible choice.
Your New Buyback Toolkit 🧰
So, the next time you see a buyback announcement, don’t just cheer. Be a smart, skeptical investor. Ask these three questions:
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Is the stock cheap or expensive right now? (Are they buying low or high?)
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How are they paying for it? (Is it with spare cash or new debt?)
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What else could they do with that money? (Could it be better spent on research, building a new factory, or paying down debt?)
Don’t fall for the magic trick. Look for real, lasting value.
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