Dear getquin community,
From time to time I come across posts and especially comments asking about the exact meaning of share buybacks.
I would therefore like to explain in simple terms to all those of you who lack the knowledge in this regard what is behind such buybacks and what advantages and disadvantages they may entail.
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A share buyback (share buyback) refers to the process by which a company own shares shares on the capital market. These shares can then either be withdrawn - which reduces the number of shares in circulation - or remain in treasury, for example for later issue as part of employee participation programs.
Companies use share buybacks for various strategic reasons. They often serve to capital structure managementthe the distribution of liquidity to shareholders or the or to improve key financial figures. Many companies resort to this method particularly in phases of stable profits, a lack of investment alternatives or a low share price.
One prominent example is the US technology group $AAPL (-0,99%) which has been carrying out a massive buyback program since 2012. By 2025, Apple will probably have invested almost 1,000 billion US dollars (that's right, 1 trillion US dollars) in share buybacks. Although the company will not record a dramatic increase in annual profits during this period, earnings per share (EPS) will rise significantly - a consequence of the lower number of outstanding shares.
Calculation example - EPS increase through buybacks (Apple, simplified):
- Annual profit (net income): USD 100 billion (unchanged)
- Before buyback: 20 billion shares outstanding → EPS = 100 / 20 = USD 5.00
- After buyback: 18 billion shares outstanding → EPS = 100 / 18 = USD 5.56
EPS increases by more than 11% simply due to the reduction in the number of shares, although the operating result has not changed. This effect can boost investor confidence and lead to a rising share price.
💪🏼 Advantages of share buybacks:
- Increase in earnings per share (EPS)The profit is spread over fewer shares, which improves the key figure.
- Flexible return of capital to shareholders: Buybacks are an alternative to dividends and offer greater flexibility in terms of timing.
- Avoidance of dilution effectsParticularly relevant for extensive share option programs.
- Signal effect on the capital marketBuybacks can be interpreted as a sign that the company believes in its future and considers the share to be undervalued.
- Positive effect on the share priceIncreased EPS and positive market confidence can support or raise the share price.
👎🏻 Disadvantages and risks of buybacks:
- Reduced ability to invest: Funds used are not available for research, development or expansion.
- Optical improvement of key figuresEPS increases without the economic substance improving.
- Short-term orientationBuy-backs can primarily serve the purpose of increasing management bonuses or meeting analysts' expectations.
- Increased balance sheet risk with debt financingCompanies that finance buybacks through loans increase their debt.
- Signal of lack of growth opportunitiesExcessive buybacks can be interpreted as an indication that the company lacks strategic investment ideas.
Sources:
- Apple Investor Relations: https://investor.apple.com
- Cash economic and financial information web portal: https://www.cash.ch/news/top-news/apple-aktienruckkaufe-durften-2025-eine-billion-dollar-ubersteigen-593593
- Investopedia - Share Buybacks: https://www.investopedia.com/articles/02/041702.asp
