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What stock buybacks mean for investors

Berkshire Hathaway’s new CEO, Greg Abel, announced on CNBC’s “Squawk Box” on March 5 that the company would begin buying back its own shares.

This is a relatively rare occurrence for Berkshire; The company has not repurchased shares since the second quarter of 2024. But the move has become increasingly common for companies like Berkshire, a financially mature conglomerate with more than $1 trillion in assets.

In 2025, companies in the S&P 500 spent nearly $1 trillion buying their own shares. According to estimates by investment research company MorningstarLast year also marked the fifth consecutive year that companies spent more on buybacks than cash dividends, according to Morningstar’s report.

Rob Leiphart, certified financial planner and vice president of financial planning at RV Capital Management, says buyback programs like dividends are touted by companies as a way to return cash to shareholders and, under the right circumstances, can be viewed by investors as a positive sign for the stock.

But he adds that investors should do some research before buying into buyback news because some companies buy shares as a way to make short-term numbers look better.

“This is a kind of financial engineering,” Leiphart says.

How do stock buybacks work?

Let’s say you’re a company with plenty of free cash flow; The money remaining after paying all expenses necessary to maintain the business. How are you using this money to create value for shareholders? Maybe you invest the money in research and development or use it to acquire another company.

For many large, financially mature companies, the answer is to give some money back to the people who own your shares. One of the classic ways to do this is They pay dividends, which are regular (usually quarterly) cash distributions to shareholders.

But over the last half-decade, companies have become more inclined to spend their money on buybacks. Last year, Apple announced $100 billion share buyback program and Alphabet Allowed $70 billion buyback. Both companies pay a modest dividend.

Under buyback programs, companies buy back their shares from the open market instead of distributing cash. While not as tangible as having cash on hand, reducing the number of shares means each share an investor owns gets a larger slice of the total pie. Since corporate earnings are expressed as “earnings per share,” withdrawing shares from the market can make the stock look more attractive to other potential investors.

The latter feature could encourage company executives to initiate buybacks to create a short-term boost, rather than making moves that will benefit shareholders in the long term, Leiphart says.

Companies that give too much compensation in the form of stock options may also use buybacks to keep those shares from falling in value, Leiphart says.

When stock buybacks are a positive sign for investors

So what should investors make of it when a company announces a buyback program? David Sekera, Morningstar’s U.S. market strategist, says this is generally a positive sign for the company’s financial health, unless the company takes on debt to finance a buyback.

“This is management’s way of communicating to the market that the company is generating excess free cash flow above its internal needs,” he says. “And in fact, they’ll probably even generate more free cash flow than they need to spend on growth to sustain their long-term guidance targets.”

Sekera says that, as in all investments, the aim of buybacks is to buy low and sell high. If a company buys shares that are trading below their intrinsic value, it’s a boon for shareholders. If they buy when it’s overpriced, “that will hurt the value,” he says.

“Management teams consistently seem to think the stock is undervalued,” he adds.

Abel’s announcement came with the context that Berkshire could repurchase the shares “at any time we believe the repurchase price is below our prudently determined intrinsic value.”

This is one of the many reasons why financial professionals should be cautious about buying any stock based solely on a buyback announcement. It’s also wise to talk to a trusted financial professional before making any changes to your portfolio.

In general, it’s important to consider any buyback program in the context of your overall view of the underlying business, Leiphart says.

“Do they have a market-leading product? Are they maintaining that leadership with that product? Has the corporate governance been there for a while and is there good leadership that has been successful and will continue to have success in the future?” he says. “In addition to these evaluations, [a buyback is] maybe when you put it all together there is something you can add as a component.”