When a company buys its own shares and cancels them, the number outstanding falls. Every remaining shareholder therefore owns a larger fraction of the same business.
The mechanism is concentration, not creation
The company spends cash to remove shares from circulation. Assets fall by the amount spent and the share count falls alongside them.
Shareholders who sell receive cash and exit. Those who hold receive nothing directly but end up with a larger proportional claim on what remains.
The business itself is unchanged and slightly smaller in cash terms, so the effect is a redistribution of ownership rather than an increase in value.
Per-share figures rise arithmetically
With fewer shares dividing the same earnings, earnings per share increase even if total profit is flat.
This makes buybacks a reliable way to improve a widely watched metric without any operational improvement, which is the main criticism of the practice.
Analysts adjust for it by examining total earnings and the change in share count separately, since the combination can conceal a stagnant business.
Buybacks and dividends distribute cash differently
A dividend pays every holder proportionally and cannot be declined. A buyback pays only those who choose to sell.
Shareholders who prefer to keep their exposure are unaffected in cash terms by a buyback, whereas a dividend forces a distribution and its tax consequences upon them.
Companies also treat the two differently in practice: dividends carry an expectation of continuity, while buybacks can be paused without the same signalling cost.
Timing determines whether value is transferred
Repurchasing above intrinsic value transfers wealth from continuing holders to sellers. Repurchasing below it does the opposite.
Since management decides the timing, the question is whether it repurchases when shares are cheap or when cash happens to be abundant, which are frequently not the same moment.
The pattern across markets is that repurchase activity tends to be strongest after prolonged rises and weakest after declines, which is the less favourable ordering.
Offsetting issuance can neutralise the effect
Companies that issue shares to employees may repurchase simply to prevent the share count from rising, rather than to reduce it.
In that case no concentration occurs, and the cash spent is effectively part of compensation cost rather than a distribution to shareholders.
Distinguishing the two requires looking at the change in shares outstanding over time rather than at the announced repurchase amount, which says nothing about the net position.