Notes On Share Repurchases 

Share repurchasing has become very popular in recent years. It's a tool that helps companies return cash to investors. Until the '80s, more than 90% of the total distributions by large U.S. companies to shareholders were through dividends; less than 10% were through share repurchases. Since '98, ~50% of total distributions have been share repurchases (see T. Koller, "Are Share Buybacks Jeopardizing Future Growth?, McKinsey on Finance, Oct. 2015). The deception with companies doing share repurchasing is that people believe it creates value simply because it increases earnings per share (EPS). 

Using the conservation of value principle, this, unfortunately, doesn't add up because the total cash flow of the business does not increase from share repurchases. Yes, while EPS does increase, so does the company's debt. With the higher leverage, the company's equity cash flows will become more volatile, which will have the investors demanding a higher return. This will weaken the company's P/E - offsetting the increase in EPS. 

Note: It should also be considered where the company could have invested the cash used in the share repurchases. Suppose the company's return on capital from the investment exceeded the company's cost of capital. In that case, the longer-term EPS would likely be higher from the investment than from the share repurchases. 

Note: Share repurchases tend to be short-term goal-oriented. They immediately increase the EPS, but they can also be at the expense of lower long-term earnings. 

Nutshell Summary: Executives should exercise caution when presented with options such as share repurchases. That appearance to create value is flawed, and the outcome is short-term rewarding and potentially long-term hurtful. Always ask, "Where is the source of the value creation?"