Buybacks are beneficial payouts as they are typically taxed more favourably than dividends*. A 1% buyback tax was introduced in the US in 2023 and increased to 4% in 2025.
Buybacks increase shareholder ownership and can boost earnings per share (EPS) by reducing the number of shares outstanding, even if overall profits remain flat. Buybacks can be especially beneficial when companies repurchase shares at prices below their intrinsic value.
From another perspective, buybacks are often viewed as a positive signal because they suggest that the CEO, who has insider knowledge, believes the shares are attractive at current prices. They can also signal financial strength as the companies that typically issue buybacks are often mature, financially stable firms with excess cash flow. On the other hand, similarly to dividends, companies may buybacks when growth opportunities are limited.
Shareholders must carefully observe if buybacks are not excessive, draining too much liquidity or if they come at the expense of long-term investments, which can harm future growth.
*Qualified dividends are taxed at long-term capital gains tax rates lower than ordinary income tax rates. For a dividend to be qualified, the stock must generally be held for at least 60 days during the 121 days surrounding the ex-dividend date.
- 0% tax rate if your taxable income is up to $44,625 (single filers) or $89,250 (married filing jointly) for 2023.
- 15% tax rate if your taxable income is between $44,626 and $492,300 (single) or $89,251 and $553,850 (married filing jointly).
- 20% tax rate if your taxable income exceeds $492,300 (single) or $553,850 (married filing jointly).