A share buyback (also called a share repurchase) occurs when a company buys its own shares from the market and cancels them, reducing the total number of shares on issue. This is an alternative to paying dividends as a way to return capital to shareholders. Many large ASX companies — including the Big Four banks, BHP, and Wesfarmers — conduct regular buybacks.
Why Companies Do Share Buybacks
Companies return capital through buybacks for several reasons:
- Excess cash — the company has generated more cash than it needs for operations or investment and returns it to shareholders
- Signal of confidence — management believes the current share price undervalues the company and is therefore a good investment
- EPS improvement — with fewer shares on issue, earnings per share (EPS) rises even if total profit stays constant
- Tax efficiency — in some situations, buybacks may be more tax-efficient for shareholders than dividends
- Offset share dilution — companies that issue shares for executive remuneration use buybacks to offset the dilution
How a Buyback Works
- The company’s board approves a buyback program (announcement released to the ASX)
- The company buys shares either on the open market (on-market) or offers to buy at a fixed price (off-market)
- Purchased shares are cancelled — reducing total shares on issue
- EPS rises because the same total profit is now divided among fewer shares
Example of EPS improvement from a buyback:
- Before buyback: Net profit $1 billion, shares on issue 500 million → EPS = $2.00
- Company buys back and cancels 50 million shares (10% of total)
- After buyback: Net profit still $1 billion, shares on issue 450 million → EPS = $2.22
- EPS increased 11% with no change in underlying profit
On-Market vs Off-Market Buybacks
On-market buyback — the company buys shares through the ASX in normal trading. Shareholders who want to sell can do so to the company, or they can do nothing and benefit from the reduced share count.
Off-market buyback — the company makes a formal offer to all shareholders at a fixed price (usually at a discount to market price), with a franking credit component attached. This was historically popular due to the tax advantages but the ATO changed the tax treatment in 2022 — off-market buybacks are now less commonly used.
How Buybacks Benefit Shareholders
For shareholders who do not sell:
- Owning a larger percentage of the company (their shares represent a bigger slice of the same total profit)
- Higher EPS, which tends to support a higher share price over time
For shareholders who do sell during the buyback:
- Receive cash for their shares
- Capital gains tax applies (CGT discount if held 12+ months)
Buybacks vs Dividends — Key Differences
| Feature | Dividend | Buyback |
|---|---|---|
| Cash received | Yes — all shareholders receive income | Only sellers receive cash |
| Tax | Taxed as income (with franking credits) | Taxed as capital gain (CGT discount applies if held 12+ months) |
| Flexibility | You receive it whether you want it or not | You choose whether to sell into the buyback |
| Effect on shares | Share count unchanged | Share count reduced; EPS rises |
| Signal | Regular commitment | Opportunistic — usually when management sees value |
For investors in the accumulation phase, buybacks can be more tax-efficient because the gain is deferred until you sell and may qualify for the 50% CGT discount. Dividends trigger immediate taxable income.
Are Buybacks Good for Shareholders?
In principle, a buyback at a fair or cheap price creates value for remaining shareholders. However:
- Buybacks at overvalued prices destroy value — the company overpays for its own shares
- Some companies conduct buybacks while simultaneously paying executives with new share issues — the buyback merely offsets dilution rather than creating genuine shareholder value
- Management may conduct buybacks to prop up EPS growth even when the business fundamentals are weakening — artificially maintaining the appearance of earnings per share growth
Related Articles
- EPS Explained
- Dividend Investing in Australia
- Franking Credits Explained
- Shareholder Rights in Australia
- ASX Shares hub
- Investing hub
Frequently Asked Questions
Do I have to do anything when a company announces a buyback? For on-market buybacks, you do not need to do anything — the company buys shares through normal market trading. If you want to participate, you can place a sell order on the ASX as you normally would. Your shares will not be forcibly bought.
Does a buyback automatically increase the share price? Not necessarily. A buyback reduces supply (fewer shares), which can support prices, but share prices are driven by many factors. The relationship between buybacks and share price appreciation is not guaranteed — it depends on whether the company is buying at a fair price and how the market interprets the buyback signal.
Are buybacks taxed differently from dividends in Australia? Participating in a buyback (by selling shares) generates a capital gain or loss — taxed under CGT rules with the 50% discount available if you held shares for 12+ months. This is different from dividends, which are taxed as ordinary income (with franking credits). For high-income investors in the accumulation phase, buybacks may be more tax-efficient; for investors on low incomes or in pension-phase super, fully franked dividends may be more valuable.
This article provides general financial information only. For advice tailored to your situation, speak with a licensed financial adviser. You can find one through the ASIC financial advisers register or MoneySmart.