Stock Buybacks Provide Security in Uncertain Times

Source: Fortune; Illustration by Mikey Burton

The stock market has been on a tumultuous road in 2025. As turbulence seems likely to continue in the medium term, publicly traded companies may tap an old friend on the shoulder to weather the storm: stock buybacks. On April 8th, Broadcom’s stock rose amidst market upheaval after the chip manufacturer announced that it would buy back $10 billion worth of shares. Although the transaction reflected only approximately 1% of Broadcom’s market cap, analysts still lauded it. 

The market viewed the decision as displaying the company’s confidence in its enterprise. Before Broadcam’s buyback, S&P 500 companies spent $243.2 billion on buying back their stock in the fourth quarter of 2024, representing a 7.4% increase over the previous quarter. Broadcom was not alone in its decision, however. Overseas, Chinese state-holding companies have also proceeded to buy back their shares in an effort to stabilize their domestic stock market. As the market continues to oscillate in 2025, more and more companies may follow suit. Although a potential safe haven for stock prices in the short term, the negative implications of buybacks are more far-reaching. 

The Mechanisms of Buybacks

Stock buybacks – also known as share repurchases – are where a company uses its profits to purchase its outstanding shares, thus lowering the number of shares available on the open market to individual investors. A company may engage in a buyback because it believes its shares are undervalued, providing its investors with an even greater return. Alternatively, a company may simply believe that buying back stock is the best allocation of its profits, eschewing the option of putting the money back into research and development, labor, or additional manufacturing infrastructure. Shareholders may also prefer buybacks over receiving dividends since dividend payments are considered income under the Internal Revenue Code and thus subject to regular income tax. Buybacks benefit from being subject to the more favorable capital gains tax rate, thus minimizing the tax burden on the relevant shareholders while having a similar practical effect to a dividend.

Typically, a company will carry out a buyback through either a tender offer or the open market. A tender offer is when a company announces that it will present an offer to shareholders that gives them the option to submit all or some of their shares at a premium to the current market price. In other words, a tender offer is where current shareholders are bought out of their shares. On the other hand, a company may simply buy back its own shares on the open market, either in one transaction or a series of transactions over time. A company may also choose to privately negotiate repurchases with individual shareholders.

Once the shares have been repurchased, they are taken off the market entirely, thus reducing the overall amount of shares available. Most often, this will increase the remaining share prices since that figure is tied to earnings per share (EPS). Generally, the fewer shares there are, the higher the individual share price. This process results in increasing the current value for the remaining shareholders, while potentially instilling confidence in the company’s overall health. 

Legally, buybacks function through Rule 10b-18 under the Securities Exchange Act of 1934. Under the Rule, issuers of stock are provided a safe harbor from liability for market manipulation under Section 9(a)(2), Section 10(b), and Rule 10b-5 of the Act when they repurchase shares of their common stock. Prior to the promulgation of Rule 10b-18 in 1982, the Securities Exchange Act of 1934 prohibited stock repurchases. Now, so long as companies comply with the statutory requirements set out in the Rule, they face no liability for repurchasing stock. 

Controversy Surrounding Buybacks

In recent years, politicians and other industry professionals have scrutinized buybacks. For example, the Biden administration attempted to raise the excise tax on stock buybacks from 1% to 4%. In theory, the proposed change was intended to encourage companies to invest more in their business operations rather than merely increasing short-term returns. However, the change never went through under Biden, as the current excise tax rate on share repurchases remains 1% to pursuant to 26 U.S.C. § 4501(a). Although the 4% rate was a part of the Harris campaign platform, it remains unchanged under the current administration. 

Repurchases have also been criticized as being a mechanism for executives to manipulate their compensation. Given that many executives of large firms have their compensation tied to the performance of the company’s stock, it might seem natural for this inference to arise. In theory, once the shares have been repurchased, EPS goes up, and a clever executive can exercise their stock options at a higher price, increasing their overall compensation. 

The theory has not played out as clearly in practice, with one Harvard study reporting that most S&P 500 companies adjusted executive performance targets in light of buybacks. Thus, these firms are preventing their executives from “gaming” their compensation. However, this theory doesn’t necessarily eliminate buybacks' effect on executive compensation. Another study from Lewis & Clark University in 2023 found that buybacks still had a notable impact on EPS, which ultimately still affected executive incentive awards. 

Looking Forward

Buybacks do not appear to be going anywhere. Some of the largest U.S. companies are now buying back stock at record rates – some even spending three times more on buybacks than they have on taxes since the 2017 corporate tax cuts. From a shareholder primacy perspective, buybacks are a clear positive since they promote maximizing shareholder value. However, the flip side of that coin is that every dollar spent on buybacks is less spent on reinvestment into business infrastructure, operations, and labor. When money is reinvested, the corporation prospers, which ultimately should benefit society. If corporations continue to consolidate their profits into maximizing the shorter-term value of their stock, then perhaps the way to “even the scale” might be to increase the tax rate on the gain from buybacks. That way, society will still benefit from ever-growing corporate profits. Of course, there is also the view that buybacks are simply corporations taking what they deem the most appropriate path forward and should not be subject to any greater level of regulation than other financial instruments. As companies tap into buybacks even more during uncertain economic times, the conversation surrounding them will only continue to rage on. 

*The views expressed in this article do not represent the views of Santa Clara University.