Share buybacks are an important way that corporate management teams look to return value to their shareholders. Buying back stock decreases the number of outstanding shares a company has in the market. Because there are fewer shares, the company’s earnings per share rise, all else held equal. Markets often see buybacks as a vote of confidence in the company's direction, as they reflect an investment the company is making in itself.
Buybacks that lead to higher stock prices also provide more tax-flexible returns than dividends. Dividends paid by U.S. corporations are typically taxed at the same rates as long-term capital gains. However, investors must pay taxes on dividend income when they receive it. Investors don’t have to pay taxes on capital gains until they sell. This allows for a deferment of the tax payment.
