A deep dive inside a CFO’s mind to understand the hidden mechanisms behind share buybacks and their corporate effects.
Oct 30, 2025
Cristian Pavoni
Over the past decade, share buybacks have been a major channel for returning cash to shareholders. Yet this process has become increasingly costly for U.S. companies. Higher interest rates have made debt-funded repurchases less attractive, and a 1% excise tax now applies to share buybacks.
Despite these headwinds, many firms with strong balance sheets continue to authorize substantial programs. This raises a key question: should companies still pursue buybacks in today’s environment? When do they truly create long-term value and when are they merely a short-term boost to earnings per share (EPS)?
With the cost of capital rising, this distinction has never mattered more for boards and investors alike.
Current Relevance
The buyback story unfolds in two stages.
The first stage occurred during the low-interest rate period following the 2008 Global Financial Crisis (GFC). As borrowing costs fell and cash reserves grew, companies increasingly turned to buybacks and steady dividends to return capital to shareholders.
Today's second stage reflects a very different environment. Policy rates are far higher than in the years following the GFC, new debt is considerably more expensive, and U.S. companies now face an excise tax on buybacks.
Despite these changes, buybacks are still being executed; however, they have become more selective. Large, cash-rich issuers with strong free cash flows continue to repurchase shares, while other issuers with high leverage or near-term maturities are taking a more conservative approach, prioritizing debt repayment and dividend stability over additional repurchases.
Buybacks stand out for the flexibility they offer to boards of directors, who can authorize a program, act on opportunity, and halt it when market conditions require.
Determining when a buyback will result in the accretion of value for a company’s shareholders, and when it will not, has never been more important to investors and corporate decision-makers.
The Buyback Mechanism
A buyback reduces the number of shares outstanding, thereby increasing earnings per share (EPS) since the same profits are distributed among fewer shares. However, the rise in EPS is not, in and of itself, a measure of economic value.
When a company takes on new debt to finance a buyback, total liabilities rise while total equity capital declines by the amount of cash spent on the repurchase.
In economic terms, buybacks make sense when two conditions exist:
first, the company has surplus cash available after funding projects that generate a return greater than the cost of capital;
second, management believes that the stock is priced at a discount relative to its intrinsic value.
If both conditions are met, then buying back shares allows management to concentrate future cash flows into the hands of long-term shareholders at attractive implied returns. If either condition is not met, then the buyback program may simply serve as a means of trading short-term appearances for long-term competitiveness.
A practical point worth noting is that most U.S. companies use the SEC’s Rule 10b-18 “Safe Harbor” for conducting open-market repurchases. This rule establishes guidelines for manner, timing, price, and volume of daily repurchases. Many issuers also utilize 10b5-1 trading plans and maintain blackout windows around earnings announcements.
While these guidelines help to establish a framework for executing a buyback program and reduce the issuer’s liability under securities laws, they do not guarantee the creation of value.
Creating Value vs. EPS Engineering
Whether a buyback creates value depends on three drivers: price, sequencing, and balance sheet position.
Price is the foundation. Repurchasing shares below intrinsic value is equivalent to transferring value from sellers to remaining shareholders, while repurchasing shares above intrinsic value does the opposite. Due to the fact that intrinsic value is a range, a good buyback program should convey the company’s valuation perspective, such as free cash flow yield, hurdle rate, or DCF range, rather than simply highlighting the size of the buyback authorization.
Sequencing is the second element. Repurchases should occur after, not instead of positive-net-present-value investments. An issuer that underinvests in capex, product development, or distribution in order to meet repurchase objectives is essentially using the company’s future competitive advantage to fund current repurchases. Investors should therefore evaluate buybacks relative to the company’s investment intensity, both historically and compared to peers.
Balance sheet is the final component. In a higher interest rate environment, issuing new debt to fund buybacks increases refinancing risk and can reduce a company’s ability to service its debt. Issuers with significant cash on hand and low leverage can afford to fund buybacks without weakening their financial resilience. On the other hand, issuers with high leverage and a maturity wall within 24 months typically cannot afford to issue new debt for buybacks without increasing their cost of capital.
These three elements explain why the same instrument can be accretive for one issuer and value-destructive for another. They also explain why many of the largest and longest-running programs belong to issuers with structural free cash flow surpluses and relatively low leverage levels.
Evidence and Living Examples
A study (Manconi, Peyer, & Vermaelen, 2018) found that buyback announcements are often associated with positive abnormal returns, suggesting that companies tend to purchase their own shares when they believe the stock is undervalued. However, this average obscures a wide range of behaviors.
Buyback programs that focus on meeting quarterly EPS targets, rather than intrinsic value, are likely to be more cyclically sensitive and to generate weaker long-run performance (with lower capital expenditure, employment, and resilience during downturns).
It follows logically: if buyback timing is driven by short-term optics, companies will tend to buy aggressively at peak valuations and scale back (on purchases) when shares are actually inexpensive.
A recent and prominent authorization provides a good illustration of a disciplined approach to buybacks. In May 2024, Apple announced a record $110 billion authorization, the largest in U.S. corporate history, and raised its quarterly dividend by 4% (Apple Inc., 2024; Reuters, 2024). This followed previous authorizations of $90 billion in 2022 and 2023, underscoring Apple’s consistent use of buybacks as its primary capital return channel.
Management explained that the buyback represented the use of free cash flow and demonstrated confidence in the company’s long-term intrinsic value. Capital expenditures and R&D spending continued to grow and the company maintained a conservative balance sheet.
Whether or not one agrees with Apple’s valuation, the way the company communicated and sequenced the buyback is consistent with the conditions of a value-creating program.
The Rate Regime Lens
Higher interest rates alter two elements of the buyback equation.
First, the attractiveness of debt-financed repurchases decreases as interest rates rise. Boards that were previously content to exchange equity for low-cost debt in 2021 are now less inclined to do so when refinancing requires significantly higher yields.
Second, the opportunity set shrinks. A higher weighted average cost of capital (WACC) means fewer internal projects exceed the hurdle rate, making repurchases appear more attractive.
The correct response is not to default to buybacks, but to sequence properly: fund high-return projects first -> protect the balance sheet -> only then repurchase if shares are trading at a discount and management can articulate why.
The 1% U.S. buyback excise tax is generally a secondary factor in this decision, as the tax impact is typically small compared to the underlying economics of pricing and funding.
Sector and Governance Nuances
Not all issuers face the same constraints.
Banks limit their buybacks through regulatory capital ratios and stress test results. Dividends take priority and repurchases occur only after buffers are established (Federal Reserve Bank of New York, 2023).
Energy companies are highly sensitive to commodity cycles. When prices are rising and balance sheets are being deleveraged, repurchases may be attractive but the board needs to anticipate volatility and guard against downside risk.
Consumer staples typically use steady repurchases to offset dilution, while maintaining capital expenditures and dividends within a tight range.
Tech companies, by contrast, often have high cash flows but also high stock-based compensation; therefore, investors should verify whether repurchases actually reduce the float or merely offset new share issuance.
Governance and incentives also shape outcomes.
Boards that tie payout decisions to intrinsic value ranges and free cash flow durability tend to perform better. Compensation plans excessively focused on EPS can encourage poorly timed repurchases, while those that emphasize growth, return on capital employed, and long-term value creation are more likely to yield sustainable results.
Transparency is essential. A clear explanation of how repurchases relate to dividends, debt policy and broader capital plans may help to alleviate concerns that buybacks are mere window dressing.
International Perspectives
Practices related to buybacks vary across markets.
The U.S. market is large and liquid, with well-defined legal frameworks and flexible buyback programs.
In Europe, authorizations often require shareholder approval, include caps and time limits, and follow different disclosure standards. In some jurisdictions, dividends are preferred due to tax treatment or signaling effects.
Japan has seen a growing trend in repurchases, supported by corporate governance reform and an emphasis on capital efficiency.
While the mechanics differ by region, the underlying principles (price discipline, sequencing, and balance sheet strength) remain consistent across borders.
Evaluating a Buyback: Step-by-Step
Investors can apply a straightforward process to assess any company’s buyback program.
Free cash flow: Review multi-year free cash flow trends and determine whether investment intensity (capital expenditures and, when relevant, R&D) has remained consistent with historical levels and peers.
Leverage and maturities: Evaluate net leverage and interest coverage ratios and examine the debt maturity schedule for the next 12–24 months. Discretionary repurchases coinciding with heavy maturities require extra scrutiny.
Share count: Review diluted shares outstanding. Did the company’s share count actually decrease, or did buybacks merely offset stock-based compensation?
Price discipline: Assess timing and valuation behavior. Does the company repurchase during market drawdowns or at peak valuations? Does it communicate a valuation framework, or simply announce a large headline number?
A useful evaluation metric is total shareholder yield, which combines buyback yield and dividend yield. A high total shareholder yield can be attractive, but only if it is funded sustainably and does not compromise the company’s competitive position.
What the Debate Often Misses
Critics of buybacks sometimes rely on gross rather than net equity inflows, apply misleading sector mixes, or infer causality from correlation. For highly profitable companies, repurchases and investment can grow together; conversely, buybacks naturally decline when new opportunities expand.
Defenders of buybacks, on the other hand, may downplay the role of agency issues: repurchases can allow management to artificially enhance per-share metrics without strengthening the underlying business.
Both sides oversimplify the tool. The impact of buybacks is conditional, their true discipline lies in the decision-making process, not in the instrument itself.
Conclusion
The current environment has raised the bar for buybacks but has not eliminated them. The aggregate amount being spent remains massive, showing that for cash-rich firms, repurchases continue to be an effective way to return excess capital.
The critical distinction is quality. Value-creating programs follow, rather than substitute for, productive investment, maintain balance sheet resilience and enforce price discipline. Evaluating buybacks through this lens helps distinguish between genuine capital allocation skill and mere EPS engineering and ultimately between creating value and taking unnecessary risks.