Do Buybacks Create Value?

There are several reasons a company would buy back its stock. A buyback could be used in lieu of a dividend, the company could be altering its debt-equity ratio, or the company could feel that its stock is the best investment possible. So do buybacks increase shareholder value? In a recent interview, Greg Milano, CEO of Fortuna Advisors, argues that buybacks result in a temporary stock price pop when the buyback is announced, but over the long-term, companies that buy back more stock tend to perform worse than other stocks. Further, the bigger the increase in the EPS due to buybacks, the lower the PE ratio falls.