Site icon howhatwhy.com

💼 Stock Buybacks: Good or Bad? The Complete Truth Behind the Corporate Move That Everyone Talks About — But Few Truly Understand

Swati Balani
Stock buyback

Stock buybacks have become one of the most debated financial strategies across global markets. Every few months, a headline sparks excitement:

“Company announces ₹10,000 crore buyback!”
“Premium offered at 20% above market price!”
“Record-breaking repurchase program!”

Shareholders celebrate. Analysts comment. Stock prices jump.

But behind every buyback lies a deeper story — of confidence, caution, strategy, optics, emotion, and sometimes, corporate insecurity.

Let’s begin the journey.

Table of Contents

1. What Exactly Is a Stock Buyback?

A stock buyback — or share repurchase — happens when a company uses its own cash to buy its shares from the open market or through a tender offer.

Think of it like a cake:
If fewer people share the same cake, each person gets a bigger slice.

Similarly, when shares reduce:

Mechanically simple. Strategically complex. Emotionally powerful.

2. Why Do Companies Do Stock Buybacks? The Real Reasons (With Global + Indian Examples)

Companies don’t do buybacks randomly. Each buyback has a motive — financial, strategic, psychological, sometimes even political.

Let’s break down the top reasons.

Reason #1: Excess Cash + Limited Growth Opportunities

One of the most common reasons companies do buybacks is because they generate more cash than they can productively reinvest.

Example: TCS (India)

TCS does frequent buybacks — ₹16,000 crore in 2017, ₹18,000 crore in 2022, and more later.
Reason?
TCS is a cash machine. It doesn’t need all that cash for aggressive expansion.

The buyback signals:
“We’re stable and mature. Instead of letting cash sit idle, we reward shareholders.”

Example: Apple (Global)

Apple has spent over $500 billion on buybacks — the largest in corporate history.
Apple’s ecosystem is so strong that even after innovation, R&D, and expansion, it still has massive surplus cash.

Buybacks help distribute value back to shareholders.

Reason #2: Management Believes the Stock Is Undervalued

Perhaps the most “emotional” reason behind buybacks.

A buyback at a premium sends a bold message:
“Our stock is worth more than the market thinks.”

Example: Infosys Buyback (India, 2025)

Infosys announced a ₹18,000 crore buyback at ₹1,800 — nearly 19% above market price.
The signal was clear:

“We trust our future. We believe the market is underestimating us.”

Example: Meta (Facebook) — 2022 Crash

After massive losses in the metaverse project, Meta stock fell 70%.
Instead of panicking, Meta initiated buybacks.

Outcome?
Confidence restored → stock recovered massively.

Buybacks can be a psychological booster in the market.

Reason #3: To Boost EPS Without Improving Real Profits

This is where buybacks become controversial.

EPS = Profit / Number of Shares

If profits stay the same but shares reduce → EPS increases.
A neat trick.

Example: IBM (2010–2020)

IBM spent billions on buybacks to maintain EPS growth.
But the underlying business was weakening.

Eventually, the market punished IBM for “financial engineering” instead of “innovation”.

Reason #4: To Reduce Dilution From ESOPs & Maintain Promoter Control

Employee stock options dilute shares.
Buybacks help offset that dilution.

Example: Reliance Industries

Reliance has strategically used buybacks to maintain promoter shareholding while rewarding investors.

Reason #5: To Support the Stock Price in Volatile Times

When stocks fall sharply, a buyback acts like a safety net.

Example: Adani Group (Post-Hindenburg)

Following the crisis, discussions of buybacks emerged as a tool to restore sentiment.

Even the thought of buyback can stabilize investor emotions.

Reason #6: When Debt Is Cheap → Borrow to Buy Back Stock

This is financially risky but attractive to companies.

Example: Boeing (Before 737 MAX Crisis)

Boeing borrowed heavily to buy back $43 billion worth of shares.
Then crisis struck… and they needed liquidity desperately.

A painful lesson:
Debt-funded buybacks can destroy long-term stability.

3. Are Stock Buybacks Good or Bad? A Stakeholder-by-Stakeholder Truth

Buybacks are neither angels nor villains.
Their impact depends on who you are.

Let’s break it down.

A. For Shareholders: Usually Good (Short-Term), Mixed (Long-Term)

Benefits

Risks

Conclusion for Shareholders:

Short-term gift, long-term depends on why buyback happened.

B. For Management: Mostly Good

Why management loves buybacks:

But if misused, it signals:
“We don’t have enough growth ideas.”

C. For Employees: Mostly Neutral, Sometimes Negative

Employees often feel little immediate benefit.
Buybacks rarely translate into raises, career growth, or job security.

Upsides

Downsides

D. For Lenders & Creditors: Mostly Negative

Debt holders prefer cash-rich companies.

Buybacks → less liquidity → higher financial risk.

Credit rating agencies closely track large buyback announcements.

E. For Regulators & Policymakers: Mixed

Regulators worry that buybacks encourage short-termism.

India introduced a special buyback tax and later changed rules to classify buyback payout as income, reducing attractiveness.

Governments want companies to reinvest in:

—not only in boosting stock prices.

F. For Society & Long-Term Economy: Often Negative

This is the least discussed — but most important.

When mature companies like Apple do buybacks → Good

(They’ve already spent enough on innovation.)

When growing companies do buybacks → Bad

(It signals lack of vision.)

Huge buybacks drain money away from:

Society pays the price when companies choose financial engineering over innovation.

4. Misconceptions About Buybacks — Debunked

❌ Myth 1: Buybacks always increase stock price

Truth: Only when business fundamentals are strong.

❌ Myth 2: Buybacks are a sign of weakness

Truth: Can be a sign of maturity and confidence too (Apple, TCS).

❌ Myth 3: Large buybacks always benefit retail shareholders

Truth: Retail acceptance is often low; promoters benefit more.

❌ Myth 4: Buybacks mean higher dividends in the future

Truth: Not necessarily. Buybacks and dividends are different signals.

5. Buybacks vs Dividends: Which Is Better?

FeatureBuybackDividend
Tax impactCan be highLower for many investors
PredictabilityOccasionalRegular
SignalingUndervaluationStable cash flow
Long-term effectReduces sharesNo share change
FlexibilityHighLow

Buybacks = flexibility
Dividends = loyalty & stability

Both have their place.

6. Hidden Risks of Buybacks That Investors Ignore

1. Overpaying for shares destroys long-term value

A buyback at a peak price becomes a long-term burden.

2. Buybacks reduce company resilience

Less cash → less buffer during downturns.

3. Financial engineering masks deeper issues

EPS rise looks good, but real profits stay stagnant.

4. Reduces future strategic options

No cash left for acquisitions or innovation.

5. Protects insiders more than small shareholders

Insiders often time their stock options before buybacks.

7. So… Are Buybacks Good or Bad? The Honest Verdict

Buybacks are “good” when:

Buybacks are “bad” when:

Buybacks are neither heroes nor villains — they’re tools.
And tools can build — or they can destroy.

8. Call To Action – A Shared Responsibility for All Stakeholders

To Investors:

Don’t celebrate a buyback blindly. Ask why it’s happening. Look deeper than the premium.

To Boards:

Approve buybacks only when they strengthen future resilience and innovation — not vanity metrics.

To Executives:

Use buybacks responsibly. Your legacy depends on how you allocate capital.

To Employees:

Understand what buybacks mean for ESOPs, culture, and company direction. Stay informed.

To Regulators:

Build guardrails that balance market efficiency with long-term societal impact.

To Society:

Value companies that innovate, not just manipulate financial optics.

“Capital is powerful — but only when it fuels progress.
Let’s demand buybacks that build stronger companies, empower employees, reward investors fairly, and create an economy that lasts.”

Read more blogs here.

Reference link.

Exit mobile version