V20: Share Buybacks of Own Stocks — How to Analyze It

Share buybacks are the most misunderstood capital allocation mechanism. Used right = a powerful value-creating signal. Used wrong = EPS manipulation with debt. This variable separates genuine compounders from companies that hide weak growth with buybacks.

This is V20 — Share buybacks of own stocks in the AKM1 model: one of the 20 variables that together determine whether a company is an institutional quality stock or a company of stories. In this article you get the variable explained, how to calculate it yourself, and how three of history's greatest investors would have interpreted it.

Why the variable exists

Share buybacks of own stocks were legalized in the USA in 1982 (SEC Rule 10b-18) after previously being considered market manipulation. In Sweden, buybacks became common only in the 2000s after changes to the companies act. Early pioneers: IBM and Exxon in the 1980s.

What is a share buyback — and why it exists

A share buyback of own stocks (share buyback / share repurchase) means that a company buys back its own outstanding stocks from the market. The bought stocks are withdrawn (retired) or kept as treasury stock. The effect: the number of outstanding stocks decreases, which raises earnings per share (EPS) even if total profit is unchanged. The mechanics are simple but the consequences are deep. A company with 100 million stocks and 100 MSEK in profit has EPS = 1,00 SEK. If the company buys back 10 million stocks (now 90 M outstanding), EPS rises to 1,11 SEK — an 11% 'growth' in EPS without the company earning a krona more. That is the power of buybacks — and their danger.

Calculating buyback return in practice

The AKM1 V20 score scale: • Score 5: Buybacks funded with free cash flow, at P/B < 1, without eroding R&D. Examples: Investor AB, Atlas Copco. • Score 4: Buybacks funded with free cash flow, at P/B 1-2. Good but not optimal. • Score 3: Buybacks funded with debt but at the right price. Acceptable. • Score 2: Buybacks funded with debt, at P/B > 2, or replacing R&D. Value-destroying. • Score 1: Aggressive buybacks funded with debt, at extreme valuations, while the business decays. Examples: Boeing 2010-2019, GE under Immelt. To check: look in the annual report for 'share repurchase program' in the cash flow statement and 'treasury shares' in the balance sheet.

The dangerous illusion — EPS manipulation

The most dangerous use of buybacks is EPS manipulation. The mechanism: a company with 0% organic growth can show 10% EPS growth by retiring 10% of the stocks. Shareholders see 'growth' that does not exist in the business. When the buyback program ends (often in a crisis when debt is too high), EPS growth collapses and the stock falls. Boeing is the most extreme example. Between 2010 and 2019, Boeing bought back for 43 bn USD — funded with debt. At the same time, they underinvested in 737 MAX development. EPS grew, the stock rose, management got bonuses. Then came the 737 MAX crashes (2018-2019) and COVID (2020). Debt was enormous, cash flow was negative, and the buyback program had emptied the cash. Boeing fell 75%. Buybacks had masked an operation in decay.

Three perspectives on share buybacks of own stocks

Peter Lynch: Lynch saw buybacks as one of the strongest signals. 'When management buys back stocks with their own money, not borrowed, they know something you do not — and they share the profit with you.' He preferred buybacks over dividends for tax reasons.

Benjamin Graham: Graham saw buybacks as neutral — he preferred the dividend. 'A dividend is a check you can bank; a buyback is a promise of future EPS growth that may or may not be fulfilled.' He distrusted buybacks made with debt.

AK1's interpretation: AKM1 weight 5% (new in the V20 expansion). We judge buybacks on three criteria: (1) funded with free cash flow, not debt; (2) at a price below intrinsic value; (3) not instead of necessary R&D investment. Buybacks done for the right reason = score 4-5; buybacks done to manipulate EPS = score 1.

Go deeper

Integrate V20 with the other 19 variables

Want to practice with worked examples, chapter by chapter? The course Share buybacks of own stocks (V20) contains 6 chapters, the Lynch and Graham perspectives, and how AK1 uses the variable in the wave matrix. See also the complete guide to Swedish stock analysis for how all 20 variables fit together.

FAQ

Vad innebär återköp av egna aktier?

Att bolaget köper tillbaka sina egna aktier på börsen. Aktierna dras in eller sparas som egna aktier (treasury stock) och antalet utestående aktier minskar. Varje kvarvarande aktie representerar därmed en större andel av bolagets vinst och kassa. Kursen Återköp av egna aktier (V20) förklarar mekaniken med räkneexempel.

Hur kan återköp höja vinsten per aktie utan ökad vinst?

Genom divisionens matte. Ett bolag med 100 miljoner aktier och 100 miljoner kronor i vinst har EPS 1,00 krona. Köps 10 miljoner aktier tillbaka delas samma vinst på 90 miljoner aktier och EPS stiger till 1,11 — en elva procenters "tillväxt" som kommer från färre aktier, inte från att verksamheten tjänar mer. Det är därför återköp kan maskera svag organisk tillväxt.

När skapar återköp värde — och när förstör de det?

AKM1 bedömer återköp på tre kriterier: de ska finansieras med fritt kassaflöde i stället för skuld, genomföras till ett pris under bolagets uppskattade värde och inte tränga ut nödvändiga utvecklingsinvesteringar. Uppfylls kriterierna är återköpet en värdeskapande kapitalallokering; görs de med skuld till höga priser medan verksamheten försvagas — som i Boeing-fallet 2010–2019 — är de EPS-manipulation.

Var hittar jag återköpen i årsredovisningen?

I kassaflödesanalysen, på rader om "share repurchase program" under finansieringsverksamheten, och i balansräkningen som "treasury shares". Jämför också antalet utestående aktier år mot år — en sjunkande kurva på aktieantalet avslöjar återköp även när de inte marknadsförs. AKM1:s poängskala 1–5 tillämpas på just de här uppgifterna.

This is educational financial analysis, not investment advice.