When Buybacks Destroy Value
Buybacks are not always good news. Companies often buy the most stock near market peaks and the least near bottoms, the exact opposite of good investing. Here are the ways buybacks can hurt shareholders.
Buying high
Buybacks tend to rise when profits and stock prices are high and fall in recessions, when shares are cheapest. A company that spends $10 billion buying stock at $200 and then watches it fall to $100 has effectively lost $5 billion of shareholder value.
| Amount | Shares bought | Value a year later | |
|---|---|---|---|
| Buyback at $200 | $10B | 50M | $5B at $100 |
| Same cash held | $10B | — | $10B |
A hypothetical example: timing turns the same cash into very different outcomes.
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