The Secret Behind Share Repurchases

How Share Repurchases Can Build Generational Wealth — or Turn It to Dust

Share repurchases can be the smartest thing a company ever does — or the dumbest. - Warren Buffett, 1999 Meeting

Let’s keep it simple.

A company has 100 million shares and earns $1B per year. EPS is $10. If it trades at a P/E of 10, the stock is $100.

Now assume net income stays flat at $1B, but over the next decade the company retires 90% of its shares. Shares fall from 100M to 10M. EPS jumps from $10 to $100. If the P/E stays the same, the stock goes from $100 to $1,000.

Same business. Same earnings. Same multiple. The only change is fewer shares. That’s the entire buyback game. That’s why it’s beautiful.

In this write-up, we analyze:

• Buybacks Done Right: When Repurchasing Shares Creates Real Value

• Buybacks Gone Wrong: How Companies Destroy Value in Plain Sight

• 3 Rules 3 Red Flags

Below are the case studies every CEO should study because capital allocation decisions often determine the fate of the entire business. With that framework in mind, let’s start with a case study that got it right.