What is a share buyback?

How do share buybacks work? 

Share buybacks happen when a company uses its cash to purchase its own shares from investors – usually on the open market. The purchased shares are often cancelled, reducing the total number in issue, which means each shareholder ends up owning a slightly larger percentage of the company. 

Buybacks are an alternative to dividends as a way of returning cash to shareholders. Instead of receiving a cash payout, the value of an investor’s shares is theoretically increased – all else being equal.

Are share buybacks good or bad?

Buybacks increase shareholder ownership and entitlement to future earnings. If profits remain constant and the number of shares fall, earnings per share (EPS) will increase and this can help support the share price.

Stock buybacks are also tax-efficient for investors in many jurisdictions as shareholders are only taxed on profits when they sell shares, while dividends are taxed as they arise. This can help the process of compounding returns when investing in a growing company.

However, the benefits of buybacks can be undermined. For example, if a company buys shares at too high a valuation at the peak of a bull market. If a share price has got too far ahead of itself, buybacks can be destructive rather than accretive. Consequently, some companies will make buybacks on occasions when they deem shares to be genuinely undervalued to signal a vote of confidence. 

As an investor, it is also worth considering that although a buyback increases your stake and boosts EPS, it can also mask a structural issue of lack of growth opportunities. Distributable profits spent on buybacks – or dividends – cannot be used for research and development, capital expenditure, acquisitions or debt reduction. 

It is therefore important to monitor how cash flow is progressing, the overall shape of the balance sheet, and the longer-term prospects for the business when deciding whether a buyback is a good or bad use of company capital.

Where are buybacks happening most rapidly?

The US dominates global buybacks by total size, accounting for approximately 71% of all global share repurchases in 2025, according to Capital Group. 

The US is also by far the most buyback-intensive major equity market. Companies returned almost one-and-a-half times as much cash through buybacks as through dividends, which reflects the long-standing US preference for repurchases over distributions.

However, an important distinction that some investors may miss is that companies engaged in buybacks may also issue a significant number of shares in various ways, such as employee equity compensation, management options, and fundraisings for acquisitions. The important metric tends to be ‘net buyback yield’ rather than a gross figure. For instance, many US technology companies have large gross buyback programmes, but their net share count reduction can be a lot lower because stock-based compensation offsets it.

This means the overall impact of buybacks could be stronger in other markets, especially where valuations are significantly lower. In this regard, Japan could be a particularly interesting buyback story. Corporate reforms have encouraged management to improve capital efficiency, resulting in almost half of major Japanese listed companies repurchasing shares in 2025, up from less than one-quarter ten years ago.

In the UK, there has been a marked uptick in buyback activity. A recent study from the FCA showed that in the three years after COVID share buybacks accounted for 42% of the capital returned to shareholders by FTSE 350 constituents, which was more than double the 20% in the three years before COVID. 

This suggests the UK market is gradually becoming more ‘American’ in its capital-allocation habits. However, it remains a high-dividend market too and therefore compares favourably on the metric of ‘total shareholder yield’ – dividends plus buybacks as a percentage of market capitalisation. Once buybacks are incorporated, the UK shareholder yield may be over 5%, which is significantly ahead of many other major markets. 

This supports the view the UK market is cheap. Though it could be argued there are good reasons why. The propensity to both pay out cash and reduce share count could reflect a lack of growth opportunities, or a weaker appetite for expansion and acquisitions at a time of more uncertain geopolitics and government policy.