Despite the high valuation of US stocks, companies have spent over $1 trillion on stock buybacks in the past year, surpassing dividends by $260 billion. The rise in buybacks has led to questions about their benefits for investors and concerns about the timing of these repurchases.

Historical data shows that share repurchases have become more popular than dividends in the US, with two-thirds of companies in the Morningstar US Market Index conducting buybacks. Tax efficiency and regulatory changes have contributed to the growth of buybacks as a means of returning cash to shareholders.

Critics argue that buybacks lack the discipline imposed by dividends and may be used to inflate earnings per share. Skepticism surrounds the motives behind buybacks, with some suggesting that managers and directors are enriching themselves through these repurchases. Politicians have also criticized buybacks as diverting funds from reinvestment.

Buybacks can be accompanied by new share issuance, diluting the benefits for shareholders. The academic literature suggests that companies conducting buybacks have outperformed those that do not, but the consistency of this outperformance remains uncertain. The fluctuation in buybacks over different market conditions raises questions about their true impact.

In Europe, dividends remain more popular than buybacks, with a higher total payout through dividends compared to buybacks. Tax advantages for buybacks differ from those in the US, influencing the preference for dividends in European markets. The concept of “total shareholder yield” combines dividends and buybacks for a more comprehensive valuation approach.

Read more at Morningstar: US Stock Buybacks Are Booming in 2025. That’s Bad News for Dividend Investors