Buying back own stock on the open market is a frequently used tool to let shareholders participate in the success of a company. At least in theory. Ideally, free cash flow is used to repurchase equities to lower share count, thus making every single piece a bit more valuable. There are examples where buybacks indeed created shareholder value. On the other hand, plenty of money has been wasted with the goal to appease shareholders, but without a positive outcome. Are buybacks good or bad, respectively when so?
Summary and key takeaways from today’s Weekly
– Buybacks per se are neither good nor bad.
– The core idea is great, but it comes down to execution and capital allocation skills.
– In the end, the underlying business must be healthy and it comes down to capital allocation skills of the management.
This is a topic that has been debated for long and likely will be forever.
There are investors who dislike buybacks and only want their dividend as this is cash straight into the pocket. Then there are the ones who don’t like dividends due to often being taxable and especially high dividends tend to signal that a company is more mature, implying lower future returns compared to a stronger-growing company.
But there’s also third group, those who want neither dividends nor buybacks. This is the case if and when the company can reinvest the capital at higher rates back into the own business, being it for organic growth or value-enhancing acquisitions.
What is the best approach?
Coming straight to the point, there likely is no “best” option. Every investor has individual preferences and not every strategy follows the same path. We are looking today at companies that have been engaging actively in buybacks as their primary tool for shareholder distributions.
There are few things one should know as buybacks are not a no-brainer, even if the size of a repurchase is big. Let’s have a look.
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both as per 02 July 2025 market close – since August 2022
Cannibalizing oneself for the greater good
Companies that buy back their own equities aggressively, are known as “cannibals”.
The difference is only that they don’t eat other companies, but themselves by reducing share count. It is no secret that Warren Buffett is a big fan of such companies, even though he is often seen as a dividend collector, mainly in association with his long-term Coca-Cola (ISIN: US1912161007, Ticker: KO) holding.
One of the reasons is the tax advantage compared to dividends.
The core idea is that buybacks – conducted at stock prices below the company’s intrinsic value (which leaves much room for interpretation) – create value for shareholders because every single share becomes more valuable. A lower share count means one stock has a higher relative share of the whole company.
Buffett in his letters one or the other time mentioned that Berkshire’s holding in for example Apple (ISIN: US0378331005, Ticker: AAPL) increased on a relative basis without Berkshire having bought more stock – the result of buybacks and less shares outstanding.
Another factor is earnings and dividends are spread over less shares, increasing the per-share results.
In the long-term, as stocks follow the business fundamentals, i.e. primarily profits and cash flows, the share price should be boosted. The theoretical end scenario would be one single share worth billions, if not trillions is left.
Coming back again to Buffett and his Berkshire Hathaway (ISIN: US0846701086, Ticker: BRK.A). Due to being a major success story and due to the fact that Buffett never split the stock, a very modest share count results in what is today the stock with single highest share price.
Share count dropped from 1.64 mn. to 1.44 mn. or 12% over the last rolling decade.
This is okay, however, not in the top league.
But frankly, with such a low share count and Buffett himself owning 36%, the float and the liquidity are small. You can see in the chart above that yesterday just 454 shares changed hands. Not millions, but indeed only 454. The USD-volume was high with 330 mn. USD, but very low and illiquid on a per-piece basis.
A very low share count should result in a very high price for a single share.
That’s why many companies aim to reduce share count aggressively to boost not only the share price for external owners, but little surprisingly also as a proof of management’s success (not seldom influencing their bonuses and / or increasing the value of their shares and options, too).
We have briefly talked about Apple, so let’s have a closer look at them.
Apple is known as a buyback-machine due to the fact that they are among those companies that spend the most USD on an absolute basis on buybacks. Over the last rolling decade, AAPL lowered share count by 34%.
This did cost them a small change of ~700 bn. USD – more than most companies have in market capitalization.
The average purchase price is 87 USD, a good chunk below the current price of around 200 bucks. In this sense, the operation was successful and Apple has created shareholder value for its owners as it paid much less per share on average compared to where the stock trades today.
The stock has obviously also risen as a result of multiple expansion (higher valuation multiple), but it is safe to say that buybacks contributed meaningfully to the strong performance.
Likely the most successful historical example is Teledyne (ISIN: US8793601050, Ticker: TDY) with its former CEO Henry Singleton. I wrote about this success already in an older Weekly (see here), but just in brief: Teleydne during Singleton’s tenure did what is today almost unthinkable.
When the stock was richly valued, he even raised equity what practically no company does today if they don’t need the money for example for an acquisition. At the trough then, he aggressively bought back shares, also using debt to boost the effectiveness.
The end result was a share count reduction of around 90% (!) over three decades.
This is the equivalent of a ten-bagger without the company as a whole business having to add any value – this comes on top. Thus, if done correctly, buybacks can be a meaningful boost.
A more recent example that is likely off the radar for most (unfortunately including me before I researched this Weekly), is Dillard’s (ISIN: US2540671011, Ticker: DDS). This is a department store operator, founded in 1938, offering what you’d expect: apparel, home and personal accessories, furnishings, etc.
Department stores are said to be a dying business model with many such companies being practically ticking time bombs or still-alive zombies.
Personally, I stopped visiting such stores long ago here locally. Maybe once a year if I am by accident close to one I’ll take a look, but the times of bigger shopping sessions to come home with a few bags even – which I remember from my childhood – are over regarding department stores.
Dillard’s stock, however, despite not being a growth story, over the last five years saw its stock going up by a factor of 18x (!). This is no typo.
Here’s the financial overview. DDS is not a growth story on a sales basis.
But the company managed to strongly increase its margins.
And it aggressively bought back its stock, lowering share count by 59% over the last ten years and 37% over the last five years.
This is an amazing performance.
Looking now at the valuation multiples over the last three years, it becomes apparent why this was possible. High torque due to absurdly low multiples, at least until about a year ago.
One key advantage of DDS is that they have a crystal-clean balance sheet which is not the case among their competition.
Quite the opposite are often commodities companies.
One name that comes to my mind is highly-celebrated Alpha Metallurgical Resources (ISIN: US0207641061, Ticker: AMR). This is a met coal producer that during the boom years 2021–2023 was suddenly flush with cash and started to aggressively repurchase shares – at partially absurdly high valuations at the top.
The stock boomed and busted.
Share count starting from the highs in 2021 fell by 31% in just a very brief period.
However, with worsening business momentum (falling steel and met coal demand and thus prices), not only the stock price fell, but also the buybacks were dialed back. Currently, management isn’t buying back any stock to preserve cash to survive the downturn which can be fierce. Most miners in the past already went through bankruptcy that’s why their charts only have a rather short history.
AMR management spent ~1.2 bn. USD for these buybacks to lower share count by 5.7 mn. shares. The resulting average repurchase price is a staggering 210 USD – double the current stock price, underscoring the potentially destructive nature of buybacks.
Theoretically, now would be a better time with a higher bang for the buck compared to the last years. But the cash has already been spent…
As commodity companies are cyclical in nature and their cash flows over- and under-shoot, it is a difficult task for sure.
But it would be clearly better not to be so aggressive on the way up, preserve some cash and then grab what you can get at much lower prices. Buybacks are nothing the management is forced to do. Often it’s a lack of capital allocation skills and as it seems a lack of understanding valuations and cyclical swings.
But does management want to wait for lower prices which is against their interest?
They do not have much to choose from. AMR stock even despite the very aggressive buybacks fell quite a lot, losing three quarters from its top in early 2024 until today.
A few other examples of weak buyback management, but more in brief, are some companies I wrote separate Weeklies about in the past. I am going through them case by case now at a higher pace.
Starting with PVH Corp. (ISIN: US6936561009, Ticker: PVH) which I featured last week (see here).
Share count is down strongly over the last ten years with the buyback pace having accelerated meaningfully in the recent past:
With limited support for the stock price.
Signet Jewelers (ISIN: BMG812761002, Ticker: SIG) lowered share count by 45%, in theory doubling the value per share. This happened even despite a massive share count bump in between in fiscal year 2022, which makes it an even higher achievement, at least viewed upon in isolation.
The reality is a different one, though.
Signet is competing with artificial, lab-created diamonds which are cheap to produce, offering a very good quality and skipping the political issues. This challenges the business model and over the long term potentially even the entire survivability of the company.
Next in line, Capri Holdings (ISIN: VGG1890L1076, Ticker: CPRI). The owner of Michael Kors, Jimmy Choo and soon-to-be-sold Versace was aggressively buying back its own stock.
Share count has fallen by 38%.
Shares, unfortunately, have been more than cut in half nonetheless.
The business is seeing weak demand and its brands don’t deliver. What was once seen as affordable luxury seems to develop more into “who-cares” brands that cannot compete either to the upside or to the downside, with pressure on sales and margins.
Harley-Davidson (ISIN: US4128221086, Ticker: HOG; see my article here). The same. Share count is down by 28.5%.
The stock, however, is down even 55%.
Harley-Davidson has been losing market share since about a decade and it’s anything but a smooth ride for the company.
There are much more examples, some of which I have featured in a separate Weekly (see here).
Taking everything together, my observation is that there’s a pattern with certain red flags repeating. There is no guarantee, but much of the damage in the form of strongly lower stock prices despite buybacks can likely be avoided this way:
If the underlying business is in trouble (structurally broken, cyclical downswing), then buybacks in most cases are a waste of money. In the worst case, a desperate attempt by management to keep the share price up which often does not happen.
As long as the company is not able to reverse course and find its way back to any form of improvement – sales growth, stronger margins or a new cyclical upswing – it is better to avoid these as they turn out to be value traps.
Other important factors, are the health of the balance sheet, the question how buybacks are financed (cash flow or debt) and at what valuation multiplies these buybacks are done. At historical highs is self-explanatory much less efficient than close to the bottom.
In the end, the underlying business must be doing well and the higher the bang for the buck, the better.
Conclusion
Buybacks per se are neither good nor bad.
The core idea is great, but it comes down to execution and capital allocation skills.
In the end, the underlying business must be healthy and it comes down to capital allocation skills of the management.
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