In plain English
Besides dividends, a company can return cash by buying back its own shares. Fewer shares remain, so each one represents a bigger slice of the company and its profit.
Example
A company with 100 million shares buys back 5 million. Everyone who still owns shares now owns a slightly larger part of the business, and earnings per share rise even if total profit does not.
Why it matters
Buybacks are more flexible than dividends: companies can pause them without the stigma of a dividend cut. Many large companies, such as Apple, return more cash through buybacks than dividends.
Limits
Buybacks only help shareholders if the company buys at a sensible price. They also give you no cash unless you sell some shares.
Common mistakes
- Assuming buybacks are always good. Some offset share issuance to employees.