Dividends, buybacks and payout: returning cash to owners
Cash that a company cannot reinvest at more than its cost of capital belongs to its owners, and it reaches them as dividends or share buybacks. This lesson shows what a buyback does to earnings per share, and what it leaves out, and reads Apple's fiscal 2025 cash flow to see how a payout larger than free cash flow was funded.
- Level
- Beginner
- Reading time
- About 26 minutes
- Know this first
- Weighted average cost of capital
By the end you will be able to:
- compare dividends and buybacks and say what each does for owners
- calculate the effect of a buyback on earnings per share, and the effect it leaves out
- say when a payout is funded by the business and when by the balance sheet
- split a change in earnings per share into growth in profit and a falling share count
What happens to the profit
A profitable company generates more cash than it needs to keep running. It has four options. It can reinvest the cash in new projects. It can repay debt. It can hold it as cash and securities. Or it can return it to owners, which it does in two ways: dividends, a cash payment to each shareholder, and buybacks, in which the company uses cash to buy its own shares from the market and retires them. The choice among these is called payout policy.
Last lesson's cost of capital sets the standard: cash should be reinvested only when the project earns more than the cost of capital, and otherwise it belongs to the owners. This lesson looks at how it is returned, uses a calculator to show what a buyback does to earnings per share, and then reads how Apple, one of the largest payers in the world, funded its payouts in fiscal 2025.
Dividends and buybacks compared
- A dividend pays every shareholder in proportion to their holding. It is visible, regular and expected, and cutting it is read as a sign of trouble, so companies set it at a level they can keep.
- A buyback pays only those who sell. Shareholders who stay own a larger share of the business afterwards, because there are fewer shares. It can be started, stopped and sized freely, so it suits cash that may not recur.
- Tax treatment of the two differs between countries, and in many it favours buybacks, because owners are taxed only when they sell, and on gains.
- Signal. A buyback can be read as management saying its shares are worth more than the market price. It may or may not be true.
A buyback does not create value by itself. If a company pays a price equal to the shares' worth, those who sell receive fair value and those who stay lose nothing. If it pays more than the shares are worth, value moves from those who stay to those who sell. If it pays less, the reverse. This is why the price matters, and why the calculator below has a price slider.
What a buyback does to earnings per share
Set the company's net income, its number of shares, how much it spends on buybacks and the average price it pays. The left page shows how many shares it retires and how many remain. The right page shows earnings per share before and after, the gain, and the earnings yield: net income per share divided by the price. Net income is held constant so you can see the effect of the lower share count by itself, and the numbers are illustrative, not Apple's actual repurchases.
Spending $90 billion at $220 a share retires 0.41 billion shares, 2.66% of the total. With the same net income of $112 billion, earnings per share rise from $7.27 to $7.47, a gain of 2.73%. At that price the shares offer an earnings yield of 3.31%, and the spending equals 80% of a year's net income.
Four experiments. First, with the defaults, a $90 billion buyback at $220 retires 0.41 billion shares, 2.66% of the total, and lifts earnings per share from $7.27 to $7.47, a gain of 2.73%. Second, raise the price to $400. The same spending buys only 0.23 billion shares and the gain falls to 1.48%. A buyback is worth more when the shares are cheap. Third, cut the price to $100: it retires 0.90 billion shares and the gain rises to 6.21%. Fourth, set buybacks to zero and nothing changes.
The catch the calculator leaves out
The calculator holds net income constant, and that flatters buybacks. The cash spent no longer sits in the bank earning interest, so net income falls a little. Suppose cash earns 4% before tax and the tax rate is 15.6%, so it earns about 3.38% after tax. A buyback raises earnings per share only if the earnings yield on the shares, 3.31% at the default price, is higher than the after-tax return the cash was earning. Here the two are close: the 3.31% earnings yield is slightly below the 3.38% on cash, so once the lost interest is counted the gain at the defaults is −0.06%, close to nothing. If the cash were to be spent anyway, the comparison is with what it would have earned elsewhere. This is why buying back shares at a high price relative to earnings does little for earnings per share.
The second catch is that earnings per share is not value. A buyback that raises earnings per share by shrinking the share count does not make the business earn more. What it changes is how many owners share the earnings.
How Apple paid out in fiscal 2025
Apple's cash flow statement shows the scale. In fiscal 2025 it generated $111,482 million of cash from operations and spent $12,715 million on property, plant and equipment, leaving free cash flow of $98,767 million. It paid $15,421 million in dividends, about $1.03 per diluted share, and spent $90,711 million buying back shares.
| Millions of US dollars | Fiscal 2025 | Fiscal 2024 |
|---|---|---|
| Net income | 112,010 | 93,736 |
| Cash generated by operating activities | 111,482 | 118,254 |
| Less: property, plant and equipment | 12,715 | 9,447 |
| Free cash flow | 98,767 | 108,807 |
| Dividends and dividend equivalents | 15,421 | 15,234 |
| Repurchases of common stock | 90,711 | 94,949 |
| Total returned to owners | 106,132 | 110,183 |
| Returned as a share of net income | 94.8% | 117.5% |
| Returned as a share of free cash flow | 107.5% | 101.3% |
| Cash and marketable securities at year end | 132,420 | 156,650 |
| Debt at year end (commercial paper and term debt) | 98,657 | 106,629 |
| Diluted shares, millions | 15,005 | 15,408 |
| Diluted earnings per share, $ | 7.46 | 6.08 |
Apple returned $106,132 million, 95% of its net income and 107% of its free cash flow. That is more than the business generated after investment, by $7,365 million. Other cash calls added to it: $5,960 million went to pay taxes when employees' share awards were settled. Cash and marketable securities fell from $156,650 million to $132,420 million, a drop of $24,230 million, and debt on the balance sheet fell by $7,972 million. In effect Apple drew down its stock of cash to pay owners more than the year's free cash flow, a policy that cannot continue for ever but that its holdings of $132,420 million can support for some time.
Reading the earnings per share figure
Diluted earnings per share rose from $6.08 to $7.46, up 22.7%. Net income rose 19.5%, and the diluted share count fell 2.6%, from 15,408 million to 15,005 million. Together they explain the whole rise: 1 + 19.5% divided by 1 − 2.6% gives the 22.7%. But the fiscal 2024 figures contain a one-time tax charge of $10.2 billion that Apple relates to a European State Aid decision. Add it back and fiscal 2024 net income was $103,936 million and earnings per share $6.75, which agrees with the $6.75 Apple reports on an adjusted basis. Measured against that, net income rose 7.8% and earnings per share 10.7%, and the fall in the share count supplied about 2.9 points of it. The fall in the share count looks more important to earnings per share once the one-off charge is taken out of the comparison.
Two cautions. The share count fell 2.6% even though Apple spent $90,711 million, because it also issues shares to employees, and the diluted count nets these. And the average price paid is not given in the figures used here, so the calculator's price is an assumption.
What payout figures cannot tell you
- One year is not a policy. A payout above free cash flow can be a deliberate drawdown, or a sign of trouble. The cash balance and the trend show which.
- Earnings per share can be managed. Buybacks funded by borrowing raise it with no gain in the business.
- Price paid matters. A buyback at a price above the shares' worth moves value from remaining owners to sellers.
- Reinvestment is the alternative. A payout is good only if the company has no project that earns more than its cost of capital.
- Reported share counts include dilution. The number of shares retired is not the change in the count.
What three global companies returned
Dividends and buybacks are the two ways a company returns cash to its shareholders. The table sets out what each of the three paid in its latest year, and compares the total with the profit that belongs to the parent company's shareholders.
| Latest year, millions of each currency | Dividends | Buybacks | Total returned | Total as a share of profit to owners | Buybacks as a share of the total |
|---|---|---|---|---|---|
| Apple | $15,421 | $90,711 | $106,132 | 94.8% | 85.5% |
| Microsoft | $24,082 | $18,420 | $42,502 | 41.7% | 43.3% |
| Toyota | ¥1,132,329 | ¥1,179,043 | ¥2,311,372 | 48.5% | 51.0% |
Apple returned 94.8% of its profit, Microsoft 41.7% and Toyota 48.5%. Share repurchases are 85.5% of what Apple returned, 43.3% of Microsoft's and 51.0% of Toyota's. Apple's ratio close to 100% means that it is returning roughly everything it earns, mostly through buybacks. Microsoft, which is investing heavily, returns the smallest share.
Toyota's shift towards buybacks
Toyota's payout changed noticeably in a year. Its buybacks rose from ¥231,069 million to ¥1,179,043 million, 5.1 times as much, and its dividends grew 28.6%. Treasury stock, the shares it has bought back and not cancelled, is deducted from equity and stands at ¥4,415,943 million on the balance sheet. A company that holds repurchased shares as treasury stock can reissue them later, while one that cancels them cannot, and the accounts show the difference in the equity section.
Habits and rules differ by country
Dividend practice is not the same everywhere. Large US companies commonly pay dividends every quarter. In Japan an interim and a year-end dividend are common, and Indian companies often pay an interim dividend and a final dividend that shareholders approve at the annual meeting. Buybacks are legal in most major markets, though the rules on how, when and how much differ, and tax treatment of dividends and gains differs by country, which changes which method shareholders prefer. In the cash flow statement, dividends paid are always financing under US GAAP, and under IFRS a company may classify them as financing or operating. That is a choice about presentation that does not change the cash paid.
An investor comparing payout policies across countries should therefore look at the total returned, not only dividends, relate it to profit and free cash flow, and check how many years the pattern has lasted.
Common mistakes
Treating a rising earnings per share as growth in the business
Part of Apple's rise came from fewer shares, and part of it from the comparison with a year depressed by a one-off charge.
Ignoring the lost interest
Cash spent on buybacks no longer earns interest. The net gain to earnings per share is smaller than the share count suggests.
Assuming a buyback always helps owners
It helps those who stay only if the price paid is below the shares' worth.
Comparing payout to profit alone
Compare it with free cash flow and with the change in the cash balance, which show how it was funded.
Counting only dividends
For a company like Apple, buybacks are more than five times the dividend. Dividends alone understate what owners receive.
Try it yourself
1. A company earns $100 million and has 50 million shares. It spends $200 million buying back shares at $40. What is earnings per share before and after, with net income held constant?
Show the working
Before: 100 ÷ 50 = $2.00. Shares retired = 200 ÷ 40 = 5 million, leaving 45 million. After: 100 ÷ 45 = $2.22, a gain of 11.1%.
2. The company in question 1 earns 3% after tax on its cash. The earnings yield at $40 is $2.00 ÷ $40 = 5%. Was the buyback a good use of cash for earnings per share?
Show the working
Yes, on this measure. The shares earn 5% on the price paid, while the cash earned 3% after tax, so replacing cash with shares raises earnings. The gain is smaller than the 11.1% because the cash's 3% income is lost.
3. A company earns $10 million and pays $2 million in dividends. What is the dividend payout ratio?
Show the working
2 ÷ 10 = 20%. The other 80% is kept in the business or used for buybacks and debt repayment.
4. Apple's free cash flow in fiscal 2025 was $98,767 million, and it paid dividends and buybacks of $106,132 million. Did it return more or less than it generated, and where did the difference come from?
Show the working
More, by $7,365 million, which is 107% of free cash flow. The gap was funded from cash and marketable securities, which fell by $24,230 million over the year.
Where this is used
- A board sets a dividend it can keep and decides how much to leave for buybacks.
- An analyst compares a company's payouts with its free cash flow to see whether they are funded from the business or from the balance sheet.
- A shareholder looks at the buyback price against an estimate of value before judging whether it helps.
- A lender notes buybacks funded by new debt, which raise leverage.
Key terms
- Dividend
- A cash payment from a company to its shareholders.
- Share buyback
- A company's purchase of its own shares from the market, usually followed by retiring them.
- Payout ratio
- Dividends divided by net income.
- Earnings per share (EPS)
- Net income divided by the number of shares.
- Diluted shares
- The share count including shares that employee awards and similar rights could add.
- Earnings yield
- Earnings per share divided by the share price.
- Free cash flow
- Cash from operations less spending on property, plant and equipment.
- Payout policy
- A company's approach to returning cash to owners.
Questions people ask
Are buybacks better than dividends?
Neither is better in general. Dividends give a steady, visible payment. Buybacks are flexible and can be tax-efficient, but benefit owners only if the price is right.
Why do companies buy back shares and also issue them?
They issue shares to employees as pay, and buy shares to offset that dilution and to return cash. The net change in the share count is what owners see.
Can a company pay more than it earns?
For a time, yes, by using cash it has built up or by borrowing. It cannot do so indefinitely.
What is a good payout ratio?
It depends on how much the company can reinvest at returns above its cost of capital. Mature, cash-rich companies pay out more; fast-growing ones pay less.
Sources and review
- Apple Inc., Form 8-K, Exhibit 99.1: fourth quarter and full-year fiscal 2025 results, filed with the US Securities and Exchange Commission. Source of net income, earnings per share, diluted shares, cash from operations, capital spending, dividends, repurchases and balance sheet items, and of the note on the one-time charge in fiscal 2024 and the $6.75 adjusted earnings per share.
- Apple Inc., Form 10-K for the fiscal year ended 27 September 2025, for the full statements.
- Corporate Finance Institute, Capital structure, for how payout and funding choices relate.
- AnalystPrep, Measures of profitability, for reinvestment against the required return.
- Apple Inc., Form 8-K, Exhibit 99.1: fourth quarter and full-year fiscal 2025 results, filed with the US Securities and Exchange Commission. Source of Apple's statements.
- Microsoft Corporation, Form 8-K, Exhibit 99.1: fourth quarter and fiscal year 2025 results, filed with the US Securities and Exchange Commission. Source of Microsoft's statements.
- Toyota Motor Corporation, FY2025 Financial Summary (IFRS, unaudited, in millions of yen), furnished to the US Securities and Exchange Commission on Form 6-K. Source of Toyota's statements.
- Deloitte, Roadmap: IFRS and US GAAP comparison, 4.3 Statement of cash flows, for the classification of interest and dividends.
How the numbers were checked: Apple's statements were tied out by code: each year's income statement and balance sheet add up, and earnings per share equal net income divided by diluted shares. Adding back the one-time charge reproduces Apple's own adjusted figure of $6.75. The decomposition of earnings per share growth was recomputed from net income and share count. The calculator was tested against separate arithmetic for 256 combinations, including that earnings per share never falls and that the gain equals shares before divided by shares after, less one.