An attendee wears a Meta Platforms Oculus Quest 2 virtual reality headset at a conference.
Investors love stock buybacks, but they don’t always spur the types of returns one might imagine. It takes a discerning eye to identify companies with buybacks that create significant gains for shareholders.
Buybacks, on their own, increase the value of each share. Repurchases reduce the number of shares outstanding. Keeping earnings constant, earnings per share goes up, supporting gains in the price per share. Buybacks also signal the confidence a company has in using profits and balance-sheet cash to finance these purchases.
But buybacks don’t always spark the type of stock-price gains investors hope for.
(GOOGL), for instance. From 2014 to a few months ago, the stock price rose only about 5% faster than the market value of its equity, or market capitalization, according to Pavilion Global Markets. Why? The parent of Google and YouTube was buying back a few more shares than it was issuing, which companies do to raise new equity investment or to pay employees without using cash. On net, Alphabet’s share count fell a bit, so as the market cap rose, the share price rose a bit faster. But the stock price probably didn’t rise as fast as investors would have wanted, given all the buybacks.
Consider that Alphabet bought back a cumulative $156 billion of stock, 1.88 billion shares, over the 10 years ended in September 2022, according to Pavilion. But the internet giant issued 1.69 billion shares to employees over that time, so the overall count only decreased by just under 200 million…