Stock buybacks—when a company repurchases its own shares—have long been a topic of debate. Are they a savvy way to reward shareholders, or a red flag for deeper issues?

As Wall Street Journal columnist Jason Zweig once put it:

“Buybacks are neither bad nor good. They are simply a tool. Just as you can use a hammer either to build a house or knock one down, buybacks are useful in the right corporate hands and dangerous in the wrong ones.”

In short, stock buybacks can be helpful, harmful, or neutral—it all depends on the circumstances. So rather than labeling them one way or the other, let’s take a clear-eyed look at how they work, why companies use them, and what they might mean for investors.

Start with Diversification

Before we get into the details, let’s ask a bigger question: what should you do about stock buybacks as an investor?

Our answer hasn’t changed—stay diversified.

Whether or not you agree with a company’s decision to buy back shares, it’s nearly impossible to predict which buybacks will add value and which might backfire. That’s why we continue to recommend investing in a globally diversified portfolio of low-cost mutual funds or ETFs, using managers who focus on long-term value—not market timing or stock picking.

By spreading your investments across a range of asset classes and regions, you can still benefit from buybacks (when they’re done well) without having to place individual bets.

How Do Stock Buybacks Work?

Companies, just like investors, can buy or sell stock on public exchanges such as the NYSE or NASDAQ. When a company has extra cash or retained earnings, it may use those funds to buy back shares from the market or make a direct tender offer to shareholders.

That said, you don’t have to sell your shares during a buyback. Participation is voluntary. And unlike a standard trade between two market participants, a buyback is a bit different—because as a shareholder, you’re also a partial owner of the company. So when a company reduces the number of outstanding shares, it can increase the ownership value of the remaining shares.

In theory, this benefits everyone. But how and when a company chooses to initiate a buyback matters.

Why Do Companies Buy Back Their Stock?

Distributing Excess Capital

When a company is profitable and sitting on more cash than it needs, a buyback can be one way to return value to shareholders. Instead of spending unnecessarily or holding onto idle capital, the company can reduce outstanding shares, potentially boosting share value.

As Zweig colorfully explained, expecting surplus cash not to be spent can be like putting raw meat in front of a lion. A well-structured buyback may be a more disciplined alternative to wasteful spending.

Creating Tax Efficiency

Buybacks and dividends both return capital to shareholders, but they’re taxed differently. While dividends are taxed when paid, gains from a buyback are only taxed when you sell your shares. This can make buybacks more tax-friendly in taxable investment accounts.

Managing Share Dilution

Companies that issue a lot of stock options—especially startups or fast-growing firms—may use buybacks to offset the impact of share dilution once employees begin exercising their options. This can help maintain the value of existing shares.

Defending Against Takeovers

When a company buys back its own shares, it reduces the number available for others to purchase—potentially making it harder for an outside party to acquire enough shares for a hostile takeover.

What’s the Tradeoff?

While buybacks can offer value in the right context, they aren’t free. Companies must use real cash—or take on debt—to repurchase shares. That’s money they won’t be using to invest in growth, pay down liabilities, or build resilience for future downturns.

So, like any major corporate decision, stock buybacks involve tradeoffs. The goal should be finding the right balance: rewarding shareholders today without jeopardizing the company’s ability to create long-term value.

What Should Investors Do?

You don’t need to chase or avoid buybacks. If you’re a long-term investor with a diversified strategy, buybacks are just one of many market forces that can influence returns.

Still, it’s worth understanding the basics—especially if you work for a company that offers buyback opportunities, or if you’re holding significant individual stock.

At Navalign Wealth Partners, we help clients take a thoughtful, strategic approach to investing—so they can stay focused on what’s within their control and avoid getting caught up in headline noise.

Have questions about how stock buybacks—or other market trends—fit into your long-term plan? Give us a call. We’re always here to help.