Share buyback

A buyback and a dividend both return cash, and neither creates value on its own. The difference is who receives it. A dividend pays every holder in proportion and leaves the share count alone. A buyback pays only the holders who choose to sell, and everybody else finishes owning a larger fraction of a company with less cash in it.

Earnings per share accretion is the argument candidates reach for and it proves nothing. A buyback lifts earnings per share whenever the earnings yield being bought exceeds the after tax return on the cash or debt paying for it, and since the earnings yield on most listed equity comfortably exceeds the after tax yield on cash, that condition is nearly always met. Accretion is arithmetic. Whether the buyback helped depends on price: only shares bought below what they are worth leave the remaining holders better off.

So treat it as capital allocation. A euro has four uses, reinvest, acquire, repay debt or return, and the buyback wins only when it beats the other three. The signalling story, that a board buying its own shares believes they are cheap, is weaker than it sounds, because repurchase activity is largest when cash and confidence are highest rather than when shares are cheapest. The genuine information is the asymmetry in commitment: boards defend a dividend and cut a buyback, so the dividend decision carries the signal and the buyback is the flexible residual.

The European constraints differ from the US ones. A buyback must come out of distributable reserves in the UK, and the European capital maintenance rules push most EU jurisdictions to the same place, so a cash rich company can be unable to repurchase. Shareholders must authorise market purchases, and the authority specifies a maximum number of shares and a price range and has to be renewed. Continental regimes typically add a statutory ceiling on the proportion of issued capital that may be held or repurchased, and both the proportion and the maximum duration of an authority vary by country. The European market abuse regime then grants a safe harbour only where purpose, disclosure and price and volume conditions are met, which is why programmes are announced and executed under a broker mandate.