What impact does a share buyback generally have on earnings per share (EPS)?

A share buyback typically results in an increase in earnings per share (EPS) because it reduces the total number of outstanding shares. When a company repurchases its own shares, the same amount of earnings is now spread over fewer shares, effectively increasing the EPS. For instance, if a company earns $1 million and has 1 million shares outstanding, the EPS would be $1. However, if the company buys back 500,000 shares, leaving 500,000 shares in circulation, the EPS would double to $2, assuming the earnings remain constant.

This action can also signal confidence from management regarding the company's value and future prospects, influencing investor sentiment positively. Hence, investors might view the increased EPS as a positive sign, potentially further driving up the stock price. Therefore, the nature of share buybacks to enhance EPS is a fundamental reason why they are often employed by companies seeking to return capital to shareholders effectively.