Stock buybacks can be a smart way for companies to return value to shareholders. But like any financial tool, they’re not without potential pitfalls. While many buybacks are done responsibly, a few missteps—or outright misuse—can lead to unintended consequences for investors, employees, and even the broader economy.

When Buybacks Miss the Mark

Research generally supports the idea that most stock buybacks do what they’re meant to do. A major global study published in the Journal of Financial and Quantitative Analysis found that, on average, share repurchases were associated with positive long- and short-term excess returns. But not all buybacks are created equal.

Some are poorly timed. Others may be motivated more by executive compensation strategies than long-term shareholder value. And in a few cases, companies have spent billions on buybacks shortly before experiencing major financial distress—leaving shareholders and taxpayers to absorb the damage.

Price Matters More Than Intention

Warren Buffett put it plainly in a 2022 shareholder letter: buybacks only create value when they’re made at prices that reflect a company’s actual worth. If a company overpays for its shares, long-term shareholders end up losing, even if the move temporarily boosts the stock price.

That’s because the capital used to repurchase shares could have gone toward other productive uses—like research, reinvestment, or paying down debt. And when buybacks are driven by short-term goals rather than sustainable value, they can backfire.

Who Really Benefits?

In many cases, corporate insiders have the most influence over whether and when buybacks happen—and they may also stand to benefit the most. If executive bonuses or stock options are tied to share price performance, it’s easy to see how conflicts of interest could arise.

There have been real-world examples. Companies like Lehman Brothers and Citigroup spent tens of billions on buybacks in the years leading up to the 2008 financial crisis—only to later require massive bailouts. These decisions, whether intentional or not, underscore how risky buybacks can be when not done with long-term sustainability in mind.

What the Government Is Watching

With the stakes high, U.S. regulators have taken a closer look at stock buybacks in recent years. Some of the attention focuses on fairness—specifically, how buybacks are taxed compared to dividends.

Under current law, dividends are taxed in the year they’re received. In contrast, gains from buybacks are only taxed when the investor sells their shares. That difference has led some lawmakers to push for higher taxes on repurchases.

In fact, the Inflation Reduction Act of 2022 introduced a 1% excise tax on corporate buybacks. And in June 2024, the IRS finalized how companies must report and pay the tax.

Key rules include:

• The excise tax applies to public companies buying back stock after December 31, 2022.
• Companies must report buybacks using Form 720 and Form 7208.
• A netting rule allows firms to offset buybacks with new stock issuances.
• Buybacks totaling under $1 million annually are exempt.

Some policymakers have proposed increasing the tax to 4%, arguing it would reduce abuse and encourage reinvestment. Others argue the tax punishes legitimate business decisions and could hurt U.S. competitiveness. As of 2025, no further increase has been signed into law.

What Should Investors Do?

The truth is, investors don’t need to track or evaluate every corporate buyback to make smart decisions. Instead, you can build a diversified investment portfolio that’s designed to capture broad market growth—buybacks included—without relying on individual corporate actions.

If you hold a concentrated position in your employer’s stock, especially if that company regularly engages in buybacks, you may want to evaluate your exposure and reduce unnecessary risk. A trusted financial advisor can help you assess where buybacks fit into your overall strategy and make adjustments if needed.

At Navalign Wealth Partners, we help clients look beyond headlines and take a thoughtful, long-term approach to financial decisions. If you have questions about stock buybacks—or how to manage company stock—you don’t have to figure it out alone.

We’re here to help you make informed decisions with confidence. Give us a call any time.