Berkshire Hathaway’s new CEO Greg Abel announced on CNBC’s “Squawk Box” on March 5 that the company will begin stock buybacks.
This is relatively unusual for Berkshire, which hasn’t bought back stock since the second quarter of 2024. But the move is becoming increasingly common for companies like Berkshire, a financially mature conglomerate worth more than $1 trillion and with deep pockets of cash.
Investment research firm Morningstar estimates that S&P 500 companies will spend about $1 trillion on stock buybacks in 2025, up from a record $942 billion in 2024. Last year was the fifth year in a row that companies spent more on stock buybacks than on cash dividends, Morningstar reports.
Rob Leipert, a certified financial planner and vice president of financial planning at RV Capital Management, said stock repurchase programs are touted by companies as a way to return cash to shareholders, similar to dividends, and under the right circumstances can be seen by investors as a positive sign for stock prices.
However, he added that investors should do some research before buying on news of a buyback, as some companies buy stock as a way to make short-term numbers look good.
“This is a form of financial engineering,” Leipert says.
Share buyback mechanism
Let’s say you’re a company with abundant free cash flow, the money that’s left over after all the expenses necessary to keep your business running. How will you use that cash to create value for shareholders? Maybe you put that money toward research and development, or maybe you 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 the stock. One classic way to do this is to pay dividends, which are regular (often quarterly) distributions of cash to shareholders.
But over the past five years, companies have increasingly been spending money on stock buybacks. Last year, Apple announced a $100 billion stock buyback program, and Alphabet approved a $70 billion buyback. Both companies also pay modest dividends.
In a stock repurchase program, a company buys back its own shares in the open market instead of distributing cash. While not as tangible as having cash on hand, reducing the number of shares effectively means that each share an investor owns becomes a bigger piece of the overall pie. Also, since corporate profits are expressed as “earnings per share,” taking a stock off the market can make it look more attractive to other potential investors.
The latter characteristic can incentivize corporate executives to initiate stock buybacks to generate short-term profits, rather than making moves that benefit shareholders over the long term, Leipert said.
Companies that issue large amounts of compensation in the form of stock options may also use stock buybacks to keep those shares from diluting their value, Leipert said.
When share buybacks are a positive sign for investors
So what should investors make when a company announces a stock buyback program? David Sekera, chief U.S. market strategist at Morningstar, says this is generally a positive sign for a company’s financial health, as long as the company isn’t borrowing money to finance the buyback.
“This just signals to the market that management is generating excess free cash flow that exceeds the internal needs of the company,” he says. “And in fact, it will probably even generate more free cash flow than it necessarily needs to spend on growth to sustain its long-term operating goals.”
As with all investments, the goal of stock buybacks is to buy low and sell high, says Sekera. If you buy stock when a company is trading below its actual value, it benefits shareholders. Buying when prices are too high “destroys value,” he says.
“Management consistently seems to think its stock is undervalued,” he added.
Mr. Abel’s announcement came in the context of Berkshire repurchasing stock “at a time when we believe the repurchase price will be below our conservatively determined intrinsic value.”
This is one of the many reasons financial experts warn against buying stocks based solely on buyback announcements. It’s also wise to consult a trusted financial professional before making any changes to your portfolio.
Overall, Leiphart says it’s important to consider share repurchase programs in light of the overall outlook for the underlying business.
“Do they have a market-leading product? Do they maintain that leadership with that product? Are the company executives there for a period of time and have been successful, and is there good leadership in place that will hopefully continue to be successful in the future?” he says. “In addition to those considerations, (share buybacks) may be one of the things we add as a factor when we put everything together.”
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