Question

Answer in a paragraph of 200 words.

Describe the pros and cons of dividends and repurchases. If you owned shares in a company, would you rather that the company pay cash dividends or repurchase its share?

Answer 1

The main intent of an investor investing in the shares of the company is for capital appreciation and income. The Shareholders gets a share in the Company’s profits through Cash Dividends and Share Buybacks.

Why Cash Dividend?

• It provides a regular stream of cash for investors.
• It incentivises the shareholder who remains invested in the company, for long time.
• The size of the dividend pay-out per share is smaller vis-à-vis buyback, which helps to maintain comfortable capital structure and gearing metrics.

Why Buy Back?

• It is a tax-efficient way to return capital to shareholders. Depending on the jurisdiction, dividends are either taxed at investors or, the company pays dividend distribution tax.
• Considering the Demand-Supply mechanics driving the value, the decline in price per share, can be supported through buy-back.
• Earnings Per Share (EPS) of the company increases, on account of reduction in number of outstanding shares. It also lowers the Share Price/EPS (P/E) ratio, which is looked at positively in the market.
• It also indicates to the market, that the share price is currently undervalued.
• It helps the promoters to increase the shareholding through buy-back from the selected / minority shareholders.
• It also provides liquidity opportunities for thinly traded stock.