When a company buys back its own shares, those shares are usually cancelled or held in treasury. The business is unchanged, and every figure expressed per share moves, which is the source of most confusion about the practice.
The denominator does the work
Earnings per share divides total profit by the number of shares outstanding. Reducing the count raises the result even if profit is flat.
The same applies to book value per share, dividends per share and any other per-share measure, because all of them share the same denominator.
This is arithmetic rather than performance, and it explains why per-share growth and total profit growth can diverge for years at a company that repurchases consistently.
Why companies choose buybacks over dividends
Both return cash to shareholders. A dividend distributes it directly, while a buyback returns it to those who sell and increases the proportional stake of those who do not.
Buybacks are discretionary in a way dividends are not. Cutting a dividend is read as distress, whereas pausing a repurchase programme passes with little comment.
That flexibility is valuable to management facing uncertain cash flows, which is why repurchases tend to expand in good years and disappear quickly in difficult ones.
Price paid determines whether it creates value
A buyback transfers value from the company to the selling shareholders at whatever price prevails. Whether continuing holders benefit depends entirely on that price.
Repurchasing below intrinsic value increases the worth of the remaining shares. Repurchasing above it destroys value for exactly the same reason.
Because companies tend to have the most spare cash when business is strong and prices are high, the timing of repurchase programmes is often unfavourable.
How compensation complicates the picture
Share-based pay increases the share count as awards vest, which dilutes existing holders steadily.
Many repurchase programmes exist substantially to offset that dilution rather than to reduce the count, so the share count stays flat while cash leaves the business.
Distinguishing the two requires looking at whether the count actually fell, which is a different question from how much was spent on repurchases.
What it signals about reinvestment
Cash returned to shareholders is cash not spent on expansion, research or acquisition. That can be prudent or it can indicate a shortage of worthwhile projects.
A mature business with limited growth options returning surplus cash is behaving sensibly, while a company repurchasing shares instead of investing in a growing market may be doing the opposite.
The practice is therefore neither good nor bad in itself, and reading it requires knowing what the alternative use of the money would have been.