| Short: You are right that a stock buyback is a technique, like dividends, to return capital to existing investors. However, stock buybacks are also a technique used by firms that believe their stock is underpriced, and is likely what is happening here. Long: To say that a firm's equity is "underpriced" is to say that the firm believes it is expensive (risk-adjusted), compared to it's debt. This implies a two things: * Asymmetric information - that the firm knows something the market doesn't. * That the firm is at a sub-optimal weighted average cost of capital, and can reduce the cost of its capital by restructuring. As found by MR Leary at Duke and cited by 600 others[1], firms resolve this situation by rebalancing their capital structure. One way to do this is to issue debt at a low interest rate to buy back the firm's "expensive" stock. The Modigliani–Miller theorem that you reference does indeed argue that capital structures don't matter and that rebalancing shouldn't need to occur. However the theory doesn't apply in practice since it assumes the absence of asymmetric information, taxes, and the presence of an efficient market [2]. 1. http://scholar.google.com/scholar?cluster=179408952930709446... 2. http://en.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theor... |