Share buyback
A share buyback is a company's repurchase of its own shares, reducing shares outstanding and lifting earnings per share. Firms use buybacks to return cash tax-efficiently, signal confidence, or offset dilution from employee share plans.
FrameworkDividend policy
See it move
A company earning €10.0 million with 5.0 million shares outstanding reports EPS of €2.00. After repurchasing 500,000 shares, the same €10.0 million is divided across 4.5 million shares, lifting EPS to €2.22 — a 10 percent rise with no change in underlying profitability. Under Modigliani–Miller, the per-share price falls proportionally, leaving total shareholder wealth unchanged.
The formula
Variables
- earnings per share after the repurchase
- net income attributable to ordinary shareholders (unchanged by the buyback itself)
- shares outstanding before the repurchase
- number of shares repurchased
The EPS rise is mechanical — the same earnings spread over fewer shares. Under Modigliani–Miller, the per-share price falls proportionally, leaving total shareholder wealth unchanged when shares are repurchased at fair value.
Check yourself
A company has 10 million shares in issue and earns net income of €20 million (EPS = €2.00). It repurchases 1 million shares at market price using surplus cash. Net income remains €20 million. Which statement correctly describes the EPS effect and its main conceptual limitation as a performance signal?