Xero is spending up to A$1 billion on its own shares. Here is how a buy-back works, and who really gains

When Xero told investors on Thursday that it would spend up to A$1 billion buying its own shares over the next 12 months, its stock jumped. It was the second program in a row: a A$550 million buy-back had only just finished.

To many people that looks strange. Why would a company hand its cash to people who are leaving, rather than spend it on the business or pay it to the people who are staying? The answer, and the catch, sit in a few simple sums.

What is a share buy-back?

A company buys its own shares, usually on the stock exchange like any other buyer, and then cancels them. The Australian Securities and Investments Commission describes the cancellation as a change to the company’s share structure: the shares simply stop existing.

Nothing about the business changes. The same shops, software or mines earn the same profit. What changes is how many pieces that profit is cut into.

How does it lift the value of my shares?

Take a simple company. It earns $50 million a year and has 100 million shares, so each share’s slice of the profit, its earnings per share, is 50 cents.

| | Before | After a 5% buy-back | |—|—|—| | Shares on issue | 100 million | 95 million | | Annual profit | $50 million | $50 million | | Earnings per share | 50.0c | 52.6c | | Your share of the company (if you hold 1 million shares) | 1.00% | 1.05% |

Shareholders who did nothing now own about 5 per cent more of the company than they did. That is the whole case for a buy-back: it is a way of returning cash to the owners who sell, while the owners who stay get a bigger stake.

The table flatters the result slightly. The cash spent would otherwise have earned interest or been invested, so in real life profit usually dips a little afterwards.

Then why do critics say it can backfire?

Because the sums only work if the price is right. If a company pays $10 for a share that is really worth $7, the shareholders who stay have handed $3 per share to the ones who left. Warren Buffett has argued for decades that a buy-back helps continuing owners only when the price paid is below what the business is worth.

There are three other common complaints:

1. Pay packets. Many executive bonuses are linked to earnings per share. A buy-back lifts that number without the business improving, which critics say rewards the wrong thing.
2. Timing. Companies tend to have the most spare cash when business is booming and share prices are high, which is the worst time to buy.
3. Lost investment. Money spent on a buy-back is not spent on new products, plants, staff or research.

Supporters reply that a company with more cash than good projects should give it back rather than waste it, and that a buy-back is more flexible than a dividend: a company can slow or stop it without the market punishing it the way a dividend cut is punished.

Why was it once illegal?

For a century, British and Australian law treated a company buying its own shares as a danger to the people it owed money to. In the 1887 case Trevor v Whitworth, the House of Lords held that a company could not buy its own shares, because doing so would drain the capital that creditors relied on.

Australia changed the rules on 1 November 1989, when amendments to the old Companies Code created a legal framework for buy-backs. In the United States, the Securities and Exchange Commission gave companies a “safe harbour” for buying their own shares on market in 1982, and the modern buy-back boom followed.

That old worry still shapes the law. Directors must make sure a buy-back does not leave the company unable to pay its debts. If it does, they can be personally liable, and a liquidator may be able to claim money back from the shareholders who sold.

What are the rules in Australia?

ASIC lists five kinds of buy-back:

1. On-market: the company buys on the ASX at the market price. This is what Xero is doing.
2. Equal access: every shareholder is offered the chance to sell the same percentage of their holding.
3. Selective: only some shareholders are bought out. This needs every shareholder’s agreement or a special resolution backed by 75 per cent of votes, and the sellers cannot vote.
4. Employee share scheme: shares held by staff under a scheme.
5. Minimum holding: a listed company buying out holdings too small to sell easily.

The key limit is the “10/12 rule”: a company can buy back up to 10 per cent of its smallest number of shares on issue in the previous 12 months without asking shareholders. Above that, most kinds need a shareholder vote.

On the ASX, Listing Rule 7.33 caps the price of an on-market buy-back at 5 per cent above the volume-weighted average price of the previous five trading days on which the shares traded. The rule is enforced: ASIC’s Markets Disciplinary Panel has issued an infringement notice to a broker that had bought shares for a client company’s buy-back at about 10 per cent above the cap.

What happened to the franking credit buy-backs?

For years, some of Australia’s biggest companies ran off-market buy-backs where shareholders tendered their shares and the company paid part of the price as a fully franked dividend. That suited investors on low tax rates, such as super funds in pension phase, who could use the franking credits. Some were happy to sell for less than the market price to get them.

The federal government announced it would end that treatment in its October 2022 Budget. The law passed Parliament on 16 November 2023 and received royal assent on 27 November 2023. For listed companies, no part of the price in an off-market buy-back is now treated as a dividend, matching on-market buy-backs, and the change applies to buy-backs announced after 7.30pm on 25 October 2022.

How big is this in the US?

Vast. Apple announced a US$110 billion buy-back in May 2024, the largest authorisation in US history. Companies in the S&P 500 spent a record US$942.5 billion buying back their own shares in 2024, and more than US$1 trillion in the 12 months to September 2025, according to S&P Dow Jones Indices. Since 2023 the US has charged a 1 per cent excise tax on the value of shares a company buys back, a measure designed to nudge companies to invest instead.

What does it mean for me?

If you hold Xero shares directly or through an index fund or super, the buy-back means your slice of the company grows a little each time the company buys. If you sell shares on market while a buy-back is running, the company may well be one of the buyers, though you will not know it; for you it is an ordinary sale.

A buy-back is also a signal. A board spending A$1 billion on its own stock is telling the market it thinks the shares are cheap. Whether it is right is the question that decides whether this money was well spent. This is general information, not advice about any investment.