Dividend Vs Share Buyback: Which Is Better?

Dividend vs share buyback: Which is better?

Dividend is the cash the company returns to all shareholders on specified intervals. It’s up to investors whether they want to reinvest or use it to pay their bills. Long-term investors often choose to reinvest dividends to take advantage of compounding. For others, dividends provide a regular stream of income.

In contrast, stock buybacks are applicable only to a small number of shareholders who surrender their shares at a premium. Investors can choose whether they want to participate in the buyback process. While dividends have no impact on the number of outstanding shares, the buyback reduces the number.

Companies have used dividends as a means to return cash to shareholders for decades. Investors have a fair idea of when and how much dividend they are going to get. It’s hard for companies to stop or reduce dividend payments. On the other hand, buybacks are irregular and can be changed quickly.

Is share buyback a fair game?

Share buybacks are more tax efficient than dividends, which makes them a win-win for the company as well as shareholders. But sometimes the management undertakes buybacks with ulterior motives, which could benefit the promoters and insiders instead of shareholders.

A large part of corporate executives’ compensation is in the form of stock options and awards. The management could use share buybacks to artificially inflate the company’s stock price to their own benefit or the benefit of large institutional investors.

If promoters don’t participate in the buyback, it increases their stake in the company since there are fewer outstanding shares. Companies sometimes take such measures to prevent takeover bids by rivals.

Share buyback is more tax-efficient but a less transparent way to reward shareholders vs dividend payments. Investors need to monitor closely why a company is buying back shares. Many companies such as Apple and Home Depot have used a combination of dividends and share buybacks to reward their shareholders.

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