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 is a part of profit which will be distributed to the shareholders whereas share repurchase is done in order to to buy back the shares from the existing shareholders at a premium to the market price so they will be tendering their share in the buyback process.

Dividend are subject to double taxation whereas repurchase are not subject to double taxation so company will be using the stock repurchase when they will feel like they are getting a higher rate of benefit due to lower payment of taxation due to stock repurchase as dividend are leading to higher taxation.

company will be preferring to opt for the dividend, when there will be a low rate of overall taxation on the dividend and higher rate of taxation on the stock buyback and company will be having higher amount of incentive related to increase in this share price.

Recently, Apple has declared dividend because it is a cash rich company and it did not opt for buyback.