When Share Buybacks Lose Their Power
By The Smart Investor  •  May 22, 2023
Share buybacks can be a powerful tool for companies to boost their future earnings per share. By buying back shares, a company’s future earnings can now be shared between fewer shares, boosting the amount each shareholder can get. Take Apple (NASDAQ: AAPL) for example. From 2016 to 2022, the iPhone maker’s net income increased by 118%, or around 14% annualised. That’s pretty impressive. But Apple’s earnings per share (EPS) outpaced net income growth by a big margin: EPS advanced by 193%, or 19.6% per year. The gap exists because Apple used share buybacks to decrease its share count. Its outstanding share count dropped by around 30%, or an annualised rate of close to 5.7%, over the same period. But the power of buybacks is very much dependent on the price at which they are conducted. If a company’s share price represents a high valuation, earnings per share growth from buybacks will be less, and vice versa.

Valuations matter

To compare how buybacks lose their effectiveness when valuations rise, let’s examine a simple illustration....
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By The Smart Investor
The Smart Investor is co-founded by David Kuo, Joanna Sng, and Chin Hui Leong. The company was formed in late 2019 from the ashes of the Motley Fool Singapore. The Smart Investor believes that everybody can learn how to invest, smartly. We aim to educate people on how to invest smartly by providing investing education, stock commentary and market coverage for Singapore and around the world.

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