The Difference in Share Repurchases & Dividend Payments
While share repurchases and dividend payments both involve publicly owned companies spending cash, they are very different financial maneuvers. A share repurchase means the company buys back some of its own stock. Dividend payments are cash distributions to current shareholders.
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Share Repurchase Basics
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Public companies are owned by a number of shareholders, each of whom holds a fractional ownership in the company based on the number of shares owned. With a share repurchase, the company buys back some of its shares currently traded in the open market, thus reducing the total number of shares available to shareholders. A share repurchase generally boosts share prices by reducing the number of shares available to own.
Divident Payment Basics
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Many companies choose to use extra cash to reward shareholders with ongoing dividend payments. Thus, payments are issued periodically, such as monthly, quarterly or annually, with a set rate paid per share. In essence, dividends provide company owners with a steady source of income from share ownership, and that helps motivate investors to buy and hold the company's stock.
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Benefits
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Though share repurchases and dividend payments generally give shareholders confidence and positively affect share price, the exact implications have subtle differences. Dividends are usually an ongoing event, as companies that issue dividends often do so consistently over time. This has a positive, but more long-term supporting effect on share price. Bill Catlin points out in his article on the Minnesota Public Radio website that while companies that have announced repurchases outperform the market over a period of a few years, their share price also typically bounces higher in the short term immediately following the news.
Cash
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The primary difference between a share repurchase and a dividend payment is that a dividend payment means immediate cash in hand for shareholders. Share repurchases do benefit shareholders because they reduce available shares and show management confidence in the company's financial position. However, the resulting boost in share price that is common only pays off if owners sell shares when the price goes up. Long-term investors can sometimes benefit more from share price increases after a repurchase.
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References
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