Question

Both a dividend payout and a share buyback achieve the result of returning capital back to shareholders. Briefly explain the circumstances under which you might advise a company to use the share buyback mechanism rather than a dividend payout.

Answer 1

Buyback of shares: Company repurchase of its own shares both kinds of shares equity and preference shares.Most of the companies have excess of surplius,financial position is good and for comany expansion they want to purcahese own shares in the market.

Buyback of shares through Free resreves, securities premium account and proceeds of any shares.

Dividend payout : Meaures the precentage of net income distributed to the shareholders in the form of dividend.

Most of the startup companies are not interested pay dividend they use surplus money for expansion.

The following circumstances company use shares buyback rather than dividend payout:

1. Well organised companies are not interested to pay dividend to the shareholders, they want to expand their existing business for introducing of new products and services using their surplus amount.

2. Company acquire own shares in the market its increased EPS value and dividend to the shareholders.

3. Most of the large undertaking they using their surplus money for buyback of shares or acquiring of a company not for dividend payment.

4.But companies providing shareholders to capital appreciation means For ex: share price $100 two years ago and today price of share increased $180 means 80% capital appreciation, share price increases means investment value also increases.

5. Most of the investors are looking for capital appreciation than dividend because large established companies are not interested to pay fixed dividend.

6. Once the company go for buyback means company financial position good in the market and competition also increased.