Lots of companies buy back stock, but few do it well

Travis Hoium
05-06

In another shocking twist, the stock market continues to rise despite tariffs leading to a collapse of imports and a potential supply shock in the next few months. But I’ve discussed that enough, and I’ll take a break from the uncertainty this week.

What Is a Buyback

For a public company, buying back shares of stock is just like buying out other owners of a private business.

If you have a private business with 10 equal owners that’s worth $1 million, then buy out one owner for $100,000, you have 9 equal owners.

If the business grows in value again to $1 million, the stake will rise in value from $100,000 to $111,111.

The way we see this in public stocks is through earnings per share.

Buybacks reduce the denominator of earnings/share.

🔼 Buybacks

🔼 Earnings per Share

But not all buybacks are good.

Rules of a Good Stock Buyback

I love a good buyback, but that doesn’t mean all buybacks are done well. In fact, most are terrible.

I have a few rules for judging buyback programs.

  1. Start with an impeccable balance sheet.

    1. If you have a lot of debt, pay that off first!

  2. Buybacks are not a way to offset stock-based compensation.

  3. Only buyback stock when shares trade for under 15x earnings and/or free cash flow.

  4. Buybacks with windfall — or one-time — profits are a red flag.

The balance sheet point should be obvious, but some companies still buy back stock despite poor balance sheets. Debt should be judged case-by-case, but I typically like zero debt for a company buying back stock.

If buying back stock is the only use for your cash, that’s a bad position to be in. For example, $Alphabet(GOOG)$ $Alphabet(GOOGL)$ $Apple(AAPL)$ $Airbnb, Inc.(ABNB)$ are buying back stock, but for what? Shares aren’t cheap enough for it to make sense, and most of the buybacks are just offsetting stock-based compensation. Those are bad buybacks.

Value is what most companies get wrong about buybacks. For example, $NVIDIA(NVDA)$ has spent over $65 billion on buybacks since 2020, and the share count is up!

$MGM Resorts International(MGM)$ , on the other hand, is buying back stock at an extremely cheap price. Management has anticipated slowing down buybacks, but thinks the stock is so cheap that it may be worth taking on debt to buy the stock. A $2 billion buyback authorization announced last week would reduce shares outstanding by nearly 25%.

$General Motors(GM)$ is another good example of a great buyback. The stock trades for 4-5x earnings, and you can see the share count is down at an 8.8% CAGR since 2021, and this chart doesn’t even do it justice. Shares outstanding ended Q1 2025 at 983 million.

Buying back stock can be a great way to add value to shareholders. But not all buybacks are good.

If you’re discerning, you can see great buybacks from a mile away and sniff out bad ones you should stay away from.

For whom haven't open CBA can know more from below:

🏦 Open a CBA today and enjoy privileges of up to SGD 20,000 in trading limit with 0 commission. Trade SG, HK, US stocks as well as ETFs unlimitedly!

Find out more here：


Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Comments

We need your insight to fill this gap
Leave a comment
3