Question

Explain the use of dividends versus repurchases? Specifically, when might a company use a dividend and when they might use a stock repurchase? Consider recent examples in the financial news.

Answer 1

Dividend and share repurchase are different ways of rewarding shareholders wherein dividend payment there will be a cash inflow to the shareholder and he will continue to remain in his position while in repurchase he has to sell at the quoted price to avail the benefit.

Dividend payment doesn't impact the balance sheet much but share repurchase is done using the retained earnings hence it makes the balance sheet lean and in fact changes the capital structure of the firm.

So a company when wants to reward the shareholder due to excellent result will go for dividend but when it is sitting over huge ideal cash and wants to take the advantage of financial leverage by changing the capital structure of the company, it will go for the buyback.

TCS has decided for share repurchase which is around 1.4% at a price of 3000. They are doing so because they have use cash and limited oppurtunities to use it in future projects spo they decided to go for a buyback.