While this year’s stock market recovery is often linked to the AI boom and resilience to tariffs, there’s something else less visible at play: U.S. companies are having a record year for buying back their own stocks.

Led by Apple, Alphabet, and JPMorgan Chase, hundreds of U.S. companies have announced $1.13 trillion in share buybacks so far this year, according to data compiled by money manager Birinyi Associates on Sept. 17. That already breaks the record for any full year, and Birinyi expects that total to top $1.3 trillion by year-end.

But what’s driving this buyback boom? And do buybacks always benefit investors?

The purpose of a stock buyback is typically to boost the price of the stock, and generally investors see them as a signal that a company is confident in its long-term outlook. But the practice can be controversial, and critics actually view buybacks as a bad sign for a company’s prospects.

Here’s more on how they work and how they’re viewed.

What exactly is a buyback, anyway?

A stock buyback is — you guessed it — when a company buys some of its stock back from its shareholders, reducing the number of outstanding shares. This usually boosts the value of the shares that remain on the open market — at least in the short term.

Companies tend to engage in buybacks when they’re flush with cash, the stock market is trending up, and they feel that their shares are undervalued.

Generally they do this by announcing what’s known as a “repurchase authorization,” which either spells out how much money they’re allocating for the buyback or the percentage of shares they’re planning to buy back. Most of the time, companies buy the stock on the open market at the market price.

The announcement doesn’t necessarily mean the company will end up buying back all the stock it’s authorized to, but historically, 90% of announced buybacks are completed within a year, according to Biryini.

What’s behind the buyback boom?

When companies have extra cash, they can pay off debt, give out raises, invest it back in their business (picture: acquisitions, hiring, expansions,) pay dividends to shareholders, or buy back some of their shares.

This year, there’s so much up in the air that buybacks may be an appealing choice, analysts say. Between evolving tariff policies, unsteady inflation trends, and the spike in AI use, it can be tricky for businesses to make long-term investment plans (like building factories in another country.)

But this is also why some investors are troubled by buybacks. Cash spent on a buyback is cash not spent on hiring and capital expenditures like equipment, factories, and research and development — things which might help the business grow in the longer-term. In other words, skeptics say that diverting cash to stock repurchases could be masking a lack of more productive, profitable growth opportunities for a company.

Do buybacks actually give back?

At a basic level, a buyback is beneficial to shareholders when it boosts a stock’s price. In the short-term, shareholders who are looking to sell their stock can potentially profit from selling at an even higher price than what they bought at.

The same may be true for longer–term investors, depending on the trajectory of the stock and when they decide to sell.

And this is where the price-to-earnings (PE) ratio may become a more important factor. Since buybacks reduce the number of available shares in a company, that company’s earnings per share (EPS) — a key measure of profitability — automatically rises. Even if the intrinsic value of the shares hasn’t changed, this can make the stock appear more attractive, because it’s now trading at a lower PE ratio (meaning a lower price relative to its earnings per share.)

Buybacks can also make the market more liquid and help reduce volatility, research has found.

On the other hand, critics view buybacks as a way of artificially pumping up a stock price in order to benefit top execs who are paid in stock.

Buybacks vs. dividends

While it’s not guaranteed that a share price will rise as a result of a buyback, companies view buybacks as one of two main ways they can reward shareholders. The other is dividends — regular per-share payments, usually made on a quarterly basis. Think of dividends as an allowance, and buybacks as a potential bonus.

Buybacks are considered the more tax-friendly option because investors don’t pay any tax until and unless they sell the shares for a profit. Income from dividends, on the other hand, is taxable in the year that it’s received.

Of the $1.6 trillion that S&P 500 companies returned to shareholders in 2024, about 40% came in the form of dividends, with the remaining 60% being buybacks, according to data from S&P Dow Jones Indices.

In short

Buybacks can mean different things to different people. They can signal that companies are confident in their growth trajectory, believe that their shares are undervalued, and have excess cash to work with. When there’s an uptick in buybacks (as we’re seeing now,) they can also help lift the broader market.

At the same time, they can indicate companies are hesitant to invest in long-term growth initiatives, which can stifle innovation and broader economic growth.

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