Beware the Boom in Stock Buybacks
They can mask transfers of wealth away from shareholders.

Executive stock options? Though originally billed as a way to align management and shareholder interests, they are now reviled by investors as a way for management to quietly loot the companies they are paid to run. When done in excess they massively dilute shareholder value over time. They also encourage short-termism and a fixation on raising the company’s stock price in the short term at the expense of planning for the company’s long-term future.
Along the same lines, share repurchases have become popular in recent decades as a tax-efficient alternative to cash dividends. Earnings paid out as dividends are taxed twice, at both the corporate and individual investor levels. But when a company uses that same cash to buy back its own shares in the open market, it can boost earnings per share without creating a taxable event.
And unlike dividends, which are usually paid quarterly, stock buybacks can be done sporadically as cash allows. Raising the regular dividend is a risky move because it is viewed as a firm commitment, and management doesn’t want to be in that awkward position of having to slash the dividend later if conditions take a turn for the worse. But buybacks can be done quietly behind the scenes and can be stopped at any time without drawing too much unwanted attention.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Again, it sounds good…in theory. In practice, companies tend to have awful timing. They buy their stock when prices are high, but in a market panic, when prices are low, they are often unable to buy because a bad economic outlook causes them to hoard cash. In the worst cases, they actually have to issue new stock…at low prices that dilute shareholders. Buying high and selling low; this is not exactly a formula for maximizing shareholder value.
But the most insidious aspect of stock buybacks is that they often fail to reduce the number of shares outstanding.
Hold the phone…How exactly could a share buyback not reduce the number of shares outstanding?
Simple. The company retires shares bought at full price on the open market to soak up new shares issued at a discount to fulfill employee and executive stock options.
That might be a little hard to digest at first, so allow me to explain. Many companies incentivize their workers with employee stock purchase plans in which the workers are allowed to buy shares of the company stock at a discount of anywhere from 5% to 50%. Alternatively, the company might match employee contributions share for share.
While the company and the workers tend to view these perks as “free money,” they are not free at all. The shareholders pay in the form of share dilution. And the same is true of executive stock options. The new shares created by the executed options dilute the existing shareholders. It may not be a cash expense, but it is a major reduction of shareholder wealth.
To prevent these new shares from diluting earnings per share, management “mops up” by buying back shares on the open market. The problem is that they effectively buy these shares at full price and sell them to employees at a discount, with the shareholders eating the difference. It’s highway robbery that is, sadly, perfectly legal.
So, how big of a problem is this?
Let’s take a look at the most recent buyback data compiled by Factset. Across the S&P 500, the “buyback yield” over the past two years has averaged a little over 3%. This means that over the preceding rolling 12 months, the companies of the S&P 500 have collectively repurchased a little over 3% of their shares outstanding. Over the course of two years, that means that their shares outstanding should have dropped by around 6%.
So, how did that work out in practice?
Not so well. The number of shares outstanding has only fallen by a cumulative 2% over the past two years.
Not all companies are equally guilty here. There are plenty that are legitimately using their excess cash flow to reduce their share counts to the benefit of their shareholders. But market-wide, the boom in buybacks is mostly a sleight of hand used to hide a massive transfer of wealth from shareholders to management and labor.
Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog. As of this writing, he was long MCD, O and UL.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Charles Lewis Sizemore, CFA is the Chief Investment Officer of Sizemore Capital Management LLC, a registered investment advisor based in Dallas, Texas. Charles is a frequent guest on CNBC, Bloomberg TV and Fox Business News, has been quoted in Barron's Magazine, The Wall Street Journal, and The Washington Post and is a frequent contributor to Yahoo Finance, Forbes Moneybuilder, GuruFocus, MarketWatch and InvestorPlace.com.
-
Stock Market Today: Stocks Soar on China Trade Talk Hopes
Treasury Secretary Bessent said current U.S.-China trade relations are unsustainable and signaled hopes for negotiations.
By Karee Venema
-
2026 Disney Dining Plan Returns: Free Dining for Kids & Resort Benefits
Plan your 2026 Walt Disney World vacation now. Learn about the returning Disney Dining Plan, how kids aged three to nine eat free, and the exclusive benefits of staying at a Disney Resort hotel.
By Carla Ayers
-
SRI Redefined: Going Beyond Socially Responsible Investing
Now that climate change has progressed to a changed climate, sustainable investing needs to evolve to address new demands of resilience and innovation.
By Peter Krull, CSRIC®
-
Here's When a Lack of Credit Card Debt Can Cause You Problems
Usually, getting a new credit card can be difficult if you have too much card debt, but this bank customer ran into an issue because he had no debt at all.
By H. Dennis Beaver, Esq.
-
Going to College? How to Navigate the Financial Planning
College decisions this year seem even more complex than usual, including determining whether a school is a 'financial fit.' Here's how to find your way.
By Chris Ebeling
-
Financial Steps After a Loved One's Alzheimer's Diagnosis
It's important to move fast on legal safeguards, estate planning and more while your loved one still has the capacity to make decisions.
By Thomas C. West, CLU®, ChFC®, AIF®
-
How Soon Can You Walk Away After Selling Your Business?
You may earn more money from the sale of your business if you stay to help with the transition to new management. The question is, do you need to?
By Evan T. Beach, CFP®, AWMA®
-
Two Don'ts and Four Dos During Trump's Trade War
The financial rules have changed now that tariffs have disrupted the markets and created economic uncertainty. What can you do? (And what shouldn't you do?)
By Maggie Kulyk, CRPC®, CSRIC™
-
I'm Single, With No Kids: Why Do I Need an Estate Plan?
Unless you have a plan in place, guess who might be making all the decisions about your prized possessions, or even your health care: a court.
By Cynthia Pruemm, Investment Adviser Representative
-
Most Investors Aren't as Diversified as They Think: Are You?
You could be facing a surprisingly dangerous amount of concentration risk without realizing it. Fixing that problem starts with knowing exactly what you own.
By Scott Noble, CPA/PFS