Are buybacks always good for shareholders?

Stock buybacks have become more visible at the Philippine Stock Exchange in recent months as share prices have weakened. When companies announce buybacks, one common reason they cite is that their share price has fallen far below what management believes is its intrinsic value.

For investors, this can sound like a positive signal because the management is willing to use the company’s own cash to buy its shares.

But this does not necessarily mean that buying back shares is the best use of the company’s cash. A company with excess cash can use that money to expand the business, repay debt or pay dividends.

In a 1986 study titled Agency Costs of Free Cash Flow, Corporate Finance and Takeovers, economist Michael Jensen argued that companies can run into problems when they generate more cash than they can invest in profitable projects.

If the management keeps too much cash inside the company, it may use the money for expansion or acquisitions that fail to earn adequate returns.

In a 2013 study published in the Journal of Corporate Finance, Walter Boudry, Jarl Kallberg and Crocker Liu studied 139 real estate investment trusts from 1996 to 2010. They found that firms with poorer investment opportunities tended to make larger share buybacks.

These studies suggest that we should look at buybacks from two sides. First, we should ask whether the company can still reinvest its cash at attractive returns. If it cannot, we can then ask whether buying back the stock offers a better way to return that cash to shareholders.

One way we can examine this is to compare a company’s return on invested capital (ROIC) with the weighted average cost of capital (WACC).

ROIC tells us how much return a company earns from the capital invested in the business, while WACC tells us how much return investors require for the risk they take. If ROIC is higher than WACC, the company creates value from the capital it employs. If ROIC is lower than WACC, the company is not earning enough to compensate investors for the cost of that capital.

Take International Container Terminal Services, Inc. (ICTSI), for example. Its estimated ROIC was 31.65 percent compared with a WACC of 13.65 percent, which means it earned returns well above its cost of capital. If ICTSI can continue to find investments that offer similar returns, reinvesting more of its cash could create greater value for shareholders.

Universal Robina presents a different case. Its estimated ROIC was 8.71 percent compared with a WACC of 13.46 percent. If new investments offer similarly low returns, putting more cash into the business may not create enough value, which could make a return of excess cash to shareholders more attractive.

Now, if we apply this framework to the 14 listed companies that conducted share buybacks this year, we can compare how much value they generated from invested capital with how aggressively they repurchased their shares. We estimated their trailing 12-month ROIC based on their 2025 audited financial statements and first-half 2026 results, then compared this with their estimated WACC.

The results show that companies that earned returns well above their cost of capital generally made relatively small buybacks, while several companies with weaker ROIC-WACC spreads had larger buybacks relative to their market capitalization.

DigiPlus Interactive, for example, had an estimated ROIC of 23.33 percent against WACC of 14.51 percent, which gave it a positive spread of about 8.81 percentage points. Despite this strong return on capital, its 2026 buyback yield was only about 0.24 percent.

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At the other end, A Brown had an estimated ROIC of 1.95 percent against WACC of 8.34 percent, which gave it a negative spread of about 6.39 percentage points. Its buyback yield was also much higher at about 2.12 percent.

Across the sample, only three of the 13 comparable companies had positive ROIC-WACC spreads, while 10 had negative spreads. The companies with positive spreads had an average buyback yield of only about 0.13 percent, compared with about 0.75 percent among those with negative spreads.

If we test this relationship across the comparable companies in the sample, we find a correlation of about negative 0.5 between buyback yield and the ROIC-WACC spread. This indicates a fairly strong inverse relationship between the two. This means that as the ROIC-WACC spread becomes lower or more negative, companies tend to spend more on buybacks relative to their market capitalization.

While this does not establish causation, the pattern is consistent with the idea that companies with fewer attractive opportunities to earn high returns on additional capital may have more reason to return excess cash to shareholders.

If the shares are genuinely undervalued, a buyback can increase the ownership stake of the remaining shareholders at an attractive price. But if the management overpays, the company gives up cash without creating enough value.

So before we get excited about a buyback announcement, we should ask whether the company has excess cash and can earn more than its cost of capital by reinvesting it. If not, buying back shares may be a better use of that cash.

Henry Ong is a registered financial planner of RFP Philippines. To learn more about investment planning, attend 118th batch of RFP Program this October 2026. To register, email [email protected].