Disclaimer
U.S. corporations spent more than $800 billion repurchasing their own stock in 2025, a record amount. But this dizzying figure masks a controversial reality: much of the market’s apparent strength over the past five years has been driven not by genuine earnings growth, but by financial engineering that artificially inflates per-share metrics.
If you own stocks or stock funds, stock buybacks affect your returns. Understanding them is essential to understanding whether stock valuations are as attractive as they appear.
What Is a Stock Buyback? (And Why Would Companies Do It?)
When a company repurchases its own stock, it removes shares from circulation. This is mathematically simple but has complex implications.
Imagine Company X has $100 million in annual earnings and 100 million shares outstanding. That’s $1 in earnings per share (EPS). Now suppose the company uses $10 million to repurchase 10% of its shares. It now has $100 million in earnings and 90 million shares outstanding, or $1.11 in earnings per share.
The company’s actual earnings didn’t increase. No new products were sold. No efficiencies were gained. But the per-share metric, which is how stocks are valued, went up 11%.
Companies argue buybacks are beneficial because:
- Returning Excess Cash: If a company has more cash than it needs for operations and investments, buybacks return capital to shareholders more tax-efficiently than dividends.
- Offsetting Dilution: Companies using stock compensation for employee options need to repurchase shares to prevent dilution to existing shareholders.
- Signaling Confidence: Buybacks can signal management confidence that the stock is undervalued.
The Controversial Reality: Buyback Timing and Debt Funding
Here’s where buybacks become ethically murky. According to Federal Reserve analysis, corporate use of cheap debt to fund buybacks has become standard. During the 2016-2020 period of near-zero interest rates, companies could borrow at 1-3% and use proceeds to repurchase shares returning 5-10% annually. The math worked beautifully, for shareholders who sold.
But now, with interest rates at 5%, this strategy creates a problem: companies are borrowing at high rates to fund buybacks, reducing capital available for research, development, and wage increases.
McKinsey research from 2026 found that 60% of companies performing large buybacks, cut research and development spending in the same year. This doesn’t immediately hurt earnings, but it compromises future growth.
Timing the Market With Buybacks
Perhaps most problematically, companies often execute buybacks at the worst possible times. They’re supposed to “signal confidence” but the reality is more cynical.
“Companies buy back stock when CFOs are incentivized by short-term stock prices, not when it’s optimal for shareholders.” — Financial Markets researcher, Yale School of Management.
Berkshire Hathaway CEO Warren Buffett long ago recognized this dynamic. In 2016, Apple announced a $250 billion buyback authorization at an average price of $109 per share. In 2022, when the stock fell to $130, Apple continued buybacks but at lower volumes. By 2026, Apple had repurchased more stock, but at an average price of $165, more than 50% higher than the 2016 base case.
The company reduced shares outstanding and increased per-share earnings metrics. But ordinary shareholders who bought throughout this period didn’t benefit proportionally because the buybacks were concentrated when stock was expensive.
The Earnings Illusion
Here’s the critical metric: Has actual earnings grown faster than revenue? Or is EPS growth a function of share buybacks?
FactSet’s 2026 analysis of S&P 500 companies reveals that while revenue grew 4% year-over-year in 2025, earnings per share grew 8%. The difference? Buybacks and financial engineering, not operational improvement.
This creates a distortion: investors are valuing companies on EPS growth (8%) when underlying business growth (4%) is far slower. If investors bought based on honest revenue growth, valuations would be considerably lower.
Are Stock Buybacks Illegal? The 2026 Controversy
For decades, large-scale buybacks were illegal. The Sherman Antitrust Act technically prohibited them as stock market manipulation. In 1982, the SEC created a safe harbor allowing buybacks under certain conditions. This has been criticized.
In 2024-2025, Congress began discussing new restrictions on buybacks. The Preventing Excessive Stock Buyback Act proposed taxes on buybacks and restrictions on buyback timing. As of 2026, no major restrictions have passed, but the political environment remains hostile to large-scale repurchases.
Some proposals would require companies to invest in wages and R&D before repurchasing shares. Others would tax buybacks as a separate category. The landscape could change significantly.
What This Means for Valuations
If you compare the stock market on traditional metrics like price-to-earnings (P/E) ratio, it looks relatively attractive in 2026 at approximately 18-20x earnings. But if you adjust for the contribution of buybacks to EPS growth, the picture darkens.
Adjusting for buyback effects, true P/E ratios might be 22-25x, significantly more expensive than headline numbers suggest. This is particularly true for mega-cap technology companies where buybacks have been most aggressive.
Read More: 5 Best Dividend Stocks for Passive Income in 2026 (Top Picks)
Which Companies Are Using Buybacks Responsibly?
Not all buybacks are problematic. Distinguishing responsible from irresponsible use requires examining:
- Buyback Timing: Does the company repurchase consistently, or sporadically at peaks? Consistent programs are generally more transparent.
- Funding Source: Does it use operating cash flow, or does it borrow? Using excess cash is legitimate; borrowing to finance buybacks is problematic.
- Alternative Investments: Are R&D and capital investment growing alongside buybacks, or shrinking? Shrinking suggests misallocation.
- Valuation Context: Are buybacks accelerating when stock is expensive? That suggests poor capital allocation.
Unilever is an example of responsible buyback usage: it repurchases shares consistently from operating cash flow while maintaining R&D investments and dividends. Apple’s massive buyback program, funded partly by debt, is more controversial.
What Should Investors Do?
You don’t need to avoid companies using buybacks, but you should adjust your valuation expectations:
- Look at Revenue Growth, Not Just EPS: Revenue is harder to manipulate. If a company shows 3% revenue growth but 8% EPS growth, buybacks are doing heavy lifting.
- Discount Valuations: Apply a valuation discount to companies heavily dependent on buybacks for earnings growth.
- Monitor Capital Allocation: Companies that balance buybacks with R&D and wage increases are likely allocating capital more responsibly.
- Watch for Debt Levels: Companies borrowing to fund buybacks have reduced financial flexibility. This becomes dangerous if business weakens.
Stock buybacks aren’t inherently evil, but they do distort the relationship between valuation and actual business performance. Smart investors account for this distortion when making investment decisions.
For more finance reporting and in-depth analysis, visit the Finance section at bdesk.news.
Ethan R. Brooks is a journalist with over 11 years of experience, specializing in finance, politics, and breaking news. He delivers timely, accurate reporting on market trends, economic developments, and major political events, helping readers stay informed on the stories that matter most.
