Imagine you own a pizza with nine other friends. You each own one slice, meaning 10 percent of the pizza. What happens if two of the friends sell their slices back to the pizzeria, and the pizzeria throws them away? Now there are only eight people sharing the remains of the original pizza. Suddenly you own 12.5 percent of the pizza instead of 10 percent, without having to pay anything extra!
This is exactly how stock buybacks work. The company uses its own cash to buy shares in the open market and cancels them. When there are fewer shares to divide the company profits on, the earnings per share (EPS) increases.
Just as the quote says, stock buybacks can feel a bit like magic for investors. The value of your shares can rise even if the company does not sell a single extra item, simply because there are fewer shares in circulation.
A company that makes a lot of money has roughly three choices for what to do with the surplus: They can invest the money in new growth, pay it out as a dividend to shareholders, or buy back their own shares. Management often chooses buybacks if they believe that their own shares are cheap, or to reward shareholders in a tax-efficient manner.