Question

Explain the advantages of stock repurchase compared to regular cash dividend.

Answer 1

Answer:

Companies offer their shareholders benefits in two ways - paying dividends and buying back of shares.
1. Dividend means a fixed return in the time frame that will be taxed whereas buying back gives uncertain future return on which tax is paid only when the shares are sold otherwise no tax is required to be paid.
2. Companies repurchase shares from the market which reduces the number of shares which gives boost to the share price. Also, it increases the earnings per share which is a measure of profitability of the company.
3. Share repurchase can help to earn capital gains and investors will pay taxes only when the shares are sold.
4. When companies repurchase shares, it portrays that it has excess cash to fund its repurchase which will create a perception in the minds of investor that company has less cash flow related problems and thereby providing security to the investors.
5. Share repurchase provides great flexibility for the company as well as for the investors. It is not an obligation for company to complete the share repurchase in a limited time frame, so the company even slow down the process if its economic conditions are down. For investors, it is upto them to control the share sale and tax payment thereon. In case of dividends, such flexibility is not available.

Therefore, summarizing the above discussion, we conclude that buyback is a better option for the company and for investors as well because it provides them flexibility, offers tax benefits, boost their earnings ratio and creates wealth for the company.