Buybacks and Beyond: How Share Repurchases Shape EPS and Investor Returns

Stock buybacks which are corporate repurchases of a company’s own shares, have become one of the most significant methods firms use to return capital to shareholders. At their core, buybacks mechanically increase earnings per share (EPS) by reducing the number of shares outstanding while leaving net income unchanged. When earnings are spread over fewer shares, EPS rises, making the company appear more profitable on a per-share basis. This reduction in share count directly boosts EPS and often supports higher stock valuations when price-to-earnings ratios remain constant.

This immediate EPS enhancement can also influence investor psychology. Many market participants interpret buybacks as a signal of management confidence, implying that executives believe the firm’s stock is undervalued and that future prospects are strong. Some investors respond by bidding up the share price, further enhancing returns for existing shareholders. Buybacks also offer tax advantages over dividends in many jurisdictions because capital gains are taxed only when shares are sold, whereas dividends are taxed as income when received.

Companies typically initiate buybacks when they generate excess free cash flow, believe their stock is undervalued, want to offset dilution from stock-based compensation, or aim to optimize their capital structure by adjusting leverage. To anticipate a potential buyback, investors often look for strong cash balances, consistent free cash flow, low reinvestment needs, manageable debt levels, and management commentary signalling capital return priorities, as outlined in company filings and capital allocation frameworks.

However, the impact on EPS does not necessarily reflect improvements in the underlying business performance. Critics argue that buybacks can be used to manufacture higher EPS figures without genuine growth in profitability, potentially masking weaker operational trends. Research on buyback effectiveness has produced mixed findings: a quantitative study from Malaysian firms found that the observed EPS increase may not always be attributable solely to share repurchases.

When it comes to long-term investor returns, empirical evidence is also complex but cautiously optimistic. A study finds that a portfolio of firms engaging in regular share repurchases, such as those tracked by the Invesco Buyback Achievers ETF, have historically outperformed the broader S&P 500 on a risk-adjusted basis over 5-, 10-, and 15-year horizons, suggesting buybacks can align with shareholder wealth maximization. At the same time, corporate governance research indicates that buybacks are not intrinsically harmful to long-term returns and may correlate with solid performance if capital allocation is disciplined and aligned with shareholder interests.

Between 2000 and 2014, IBM spent over $100 billion on share repurchases. The company was attempting to hit long-term EPS targets and used buybacks as a tool to support per-share growth even as revenue began to stagnate. While EPS improved for several years, revenue declines and competitive pressures in cloud computing eventually caught up. The stock underperformed over the long term compared to broader indices. In this case, buybacks boosted EPS mechanically but did not offset weakening fundamentals, illustrating how repurchases cannot substitute for business growth.

Another example of buybacks is Berkshire Hathaway. Under Warren Buffett, Berkshire historically avoided buybacks unless shares traded below intrinsic value. Starting in 2018 and accelerating in 2020–2021, Berkshire repurchased tens of billions in stock when management believed the shares were undervalued relative to the company’s long-term earnings power. Because the buybacks were opportunistic rather than routine, they increased each remaining shareholder’s ownership stake at attractive prices. Berkshire’s disciplined approach is often cited as an example of buybacks done “right”, enhancing per-share value without straining the balance sheet.

In conclusion, while stock buybacks can materially lift EPS and support stock prices in the near term, their effect on sustainable long-term investor returns depends on how wisely repurchased capital is deployed. Investors should look beyond headline EPS figures to assess whether buybacks reflect a company’s competitive strength and prudent financial strategy rather than mere financial engineering.