← Money Lessons with Andrew Temte, PhD, CFA
Money Lessons with Andrew Temte, PhD, CFA
Stock Splits and Share Buybacks: What Every Investor Should Know
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Foreign. Hi, I'm Andy Tempte, and welcome to Money Lessons. Join me every Saturday morning for bite sized lessons that are designed to improve financial literacy around the world. Today is April 4, 2026. Last week we talked about what you actually own when you buy a share of stock a residual claim on the company's assets and earnings, along with voting rights, dividend rates and the right to sell. We used a simple example. If a company has 1 million shares outstanding and you own 1,000 of them, you own 1/10 of 1% of the company. But what happens when the company changes the number of shares outstanding? Companies do this more often than you might think, and it can be confusing if you don't understand the mechanics. Today we're going to walk through the three most common ways that companies alter their share stock splits, reverse stock splits, and share buybacks and what each one means for you as a shareholder. So let's start with stock splits, because they generate a surprising amount of excitement for something that really doesn't actually change a company's value. A stock split is exactly what it sounds like the the company divides its existing shares into more shares in a two for one split. Every share you own becomes two shares each, worth half of the original price after the split. If you held 100 shares at 200 each, which is a $20,000 total investment, you'd wake up the next morning with 200 shares valued at about $100 apiece. Still a $20,000 investment. Your own percentage hasn't changed. The company's total market value hasn't changed. Nothing fundamental has changed. Think of stock splits like slicing a pizza. If you cut an eight slice pizza into 16 slices, you have more slices but the same amount of pizza. So why do companies bother? The answer is accessibility. When a stock price climbs high enough, it can feel out of reach for smaller investors. Apple has split its stock five times since going public in 1983 two for one splits, one seven for one split back in 2014, and a four for one split back in 2020. That last split brought the share price from roughly $500 a share down to 1:25, making it easier for everyday investors to buy whole shares. One share of Apple purchased before its first split ever did would be equivalent to 224 shares today. The most famous exception to the stock split convention is Warren Buffett's Berkshire Hathaway. Buffett never split Berkshire's Class A shares, which currently trade above $700,000 per share. Yes, $700,000 for a single share. His reasoning? A High share price attracts long term investors who share his buy and hold philosophy and discourages short term speculation when pressed by shareholders who couldn't afford that price tag. Buffett didn't split the stock. Instead, back in 1996, he introduced class B shares at a fraction of the cost, which are currently trading at around $480 a share, giving smaller investors a way without compromising the Class A share structure. Now let's flip the script. A reverse stock split works in the opposite direction. The company consolidates its shares. A 1 for 10 reverse split is one where every 10 shares you own become one share at 10 times the price. If you had 1,000 shares trading at $0.80 apiece, you'd end up with 100 shares priced at $8 apiece, the same total value. But the motivation here is very different from a forward split. Both the New York Stock Exchange and the NASDAQ require listed companies to maintain a minimum share price of $1 a share. If a stock falls below that threshold for 30 consecutive trading days, the exchange issues a deficiency notice and the company faces a ticking clock to get its price back up over a dollar or risk being delisted from the exchange. A reverse stock split is often the last resort for companies in that situation. It boosts the share price mechanically without requiring any improvement in the underlying business. Savvy investors tend to view reverse splits with skepticism because they often signal that a company is struggling. Now here's where things get more interesting. While stock splits simply rearrange the pieces, share buybacks actually change the size of the piece. A share buyback, also called a share repurchase, is when a company uses its own cash to buy its shares on the open market, just like any other investor would. Those repurchased shares are pulled out of circulation, they no longer vote, they don't receive dividends, and they don't count when calculating earnings per share, a metric that we haven't covered yet, but one that's simple to understand. Earnings per share is the company's total net income divided by the number of shares outstanding. The company can either hold these repurchased shares as what's called treasury stock, which is essentially dormant shares sitting on the company's balance sheet that could be reissued later, or it can retire them permanently, removing them from existence altogether. Treasury stock ties into a larger topic called capital structure, or the way a company organizes its mix of debt and equity. And we're going to explore that later in our journey together. Now, why would a company buy back its own stock? First, it's a way to return cash to shareholders without paying dividends. If a company generates more cash than it needs for operations and growth, you remember our discussion of free cash flow from last week? It can use that excess cash to repurchase shares. Second, buybacks reduce the number of shares outstanding, which increases the earnings per share calculation. If a company earns $10 million and has 10 million shares outstanding, that's $1 in EAR earnings per share. Now, if it buys back 2 million shares, the same $10 million in earnings is now spread across only 8 million shares, or EPS becomes $1.25 per share. The company didn't earn more money, but each remaining share represents a larger slice of those earnings. Now here's where you need to be a critical thinker. That mechanical boost to earnings per share can make a company look like it's growing faster than it actually is. Experienced investors look past the headline earnings per share number to see whether the company's actual revenue and operating income are growing, too, or whether the improvement is just financial engineering. A company that's borrowing money to buy back its own stock at inflated prices while neglecting investment in its own business is not creating value for you. It's simply rearranging deck chairs. Now let's talk about the mirror image of stock buybacks, which is called dilution. When a company issues new shares, whether through a secondary offering to raise capital or through employee stock option programs, the total number of shares outstanding increases and your ownership percentage shrinks. You still own the same number of shares, but each one represents a smaller slice of the company. Dilution is a real cost to existing shareholders, and it's one reason companies use buybacks to offset the shares being created through employee compensation programs. Many companies issue shares to employees through stock options while simultaneously buying back shares on the open market, trying to keep the total share count roughly stable. Now what does this mean for you? None of these actions change what a company is fundamentally worth. A stock split doesn't make a company more valuable any more than cutting a pizza into smaller slices gives you more food. A reverse split doesn't fix a broken business, and a buyback only creates real value if the company is repurchasing shares at a price below what they're truly worth. And if the cash wouldn't have been better spent investing in the company's future. Understanding these mechanics helps you see past the headlines. When you hear that a company announced a stock split, you'll know not to rush in and think the stock just got cheaper. When you see a reverse split, you'll know to ask harder questions about the operations of the business and its health. And when a company touts a massive buyback program, you'll know to check whether earnings are actually growing on an adjusted basis or just being concentrated into fewer shares. Next week, we'll explore different dividends, what they are, how they work, and why some companies pay them while others don't. Until next week, I wish you grace, dignity and compassion. My name is Andy Tempte. This is Money Lessons. You can find the show on all the major streaming services as well as out on YouTube. Please like, subscribe, rate and most importantly, share this public good with your friends, your family, your colleagues, and maybe a neighborhood. The show was produced by Nicholas Tempte, and we'll see you next time on Money Lessons.