Dividends or repurchases – Which are more suitable for shareholders?
Dividends and share repurchases are often referred to as the "return" of the company to shareholders as if they were functionally equivalent. But they are not equal at all.
In fact, the only similarity between dividends and share repurchases is that the company pays its retained earnings. If you are a shareholder, it really is your money managed by the company. Sensitive stock investors should not be indifferent to the way the company is used to "return" to its shareholders. Let's look at what the differences are and decide what is better for the sensitive stock investors.
Dividend simple: the company gives you money. Dividends are usually announced on a quarterly basis, approved by the board of directors and sent to shareholders in a matter of weeks. The board of directors announced that the dividend would be $ 1.00 per share. If you own 100 shares, they give you $ 100. What can be simpler?
Share repurchase is not complicated, but more than dividends. Through the stock repurchase program, the board authorizes the use of the company's retained earnings in the open market to buy their own shares. The plan could be, for example, that over the next six months, the company would buy 1,000,000 shares of itself, putting them inside and thus leaving the market. If the stock is sold for an average of $ 20 per share during the plan period, the company will spend $ 20,000,000 to buy back its own shares.
Why are these two very different corporate acts often referred to as "lending" to shareholders the same way? Because, in theory, in each case, the company uses some of its retained earnings to transfer something of value to the shareholders. With bonuses, "something of value" is money itself. The company gives you a check. In the stock repurchase, "something of value" (theoretically) appears in the form of an increase in surplus market value. After the company repurchases the X shares, each remaining share (in theory) is more valuable to its owner. Company sent has been cut into less, so slightly larger. The total number of shares outstanding decreased, so the remaining shares accounted for a large proportion of the company's ownership of the future income requirements slightly higher.
Yes, suppose you are a shareholder of the company. You should be concerned about the company choose to send you "valuable things" line?
Here are the pros and cons of the dividend:
o pro: they are cash in your pocket, real money. There is no theory. You can re-invest the money in the company, or you can do whatever you want. You can use it as income.
o Pro: Most dividend plans are equivalent to corporate policies. Companies rarely cut or eliminate dividends. Even though each dividend payment is a separate event, the overall plan is that most companies pay dividends sacrosanct.
o Pro: Dividends help to support higher stock prices, assuming the market is valuable for strong dividend plans. Studies have shown that, for a long time, the market does have value for the dividend plan.
o Dividends are closely watched and reported, so information about them is readily available. Over time, the dividend model established by the firm is predictable. Immediate reporting of significant changes in patterns.
o Con: You must pay dividends. However, a federal income tax rate of 15% dividends makes it one of the least profitable forms available.
This is the pros and cons of stock repurchase:
o Specialty: Because there is no money sent to you, you do not tax.
o Ordinary Shares: Share repurchases reduce the number of shares outstanding, thereby increasing the value of the remaining shares. However, in order to realize this added value, the market must recalculate the remaining shares upward. What is valuable to you is theory, unless and until this happens.
o Con: There is no money for you. If you want to increase the value represented by the money, you must sell some of your stock. The money you receive from the sale is then taxed at the long-term or short-term capital gains tax rate (assuming the sale price is higher than the price you originally paid for the stock). The federal long-term interest rate is 15%, the same as dividends. The short-term interest rate is your marginal tax rate and may be higher.
o Con: The stock repurchase program is "one-off", not the regular plan of most companies. They are unpredictable for size or frequency.
o Con: Share repurchase program is not closely monitored. Many of them never finished after their initial announcement. This failure was reported inconsistently in the financial press.
o Con: Many companies repurchase stock to repay their executives (and other employees) on the stock option grant. Managers turned and immediately sold the shares back to the company as they were part of their pay package. Therefore, the company's share repurchase is the company's compensation costs. Executives, not the owners, get the money.
o Con: Usually, stock repurchases take place at the highest price of the stock. This is because the plan may be in response to the outbreak of profit and implementation, which prompted the stock market prices. This may also be because the company now needs stock to pay back the options that are exercising – times that the company can not control.
It is an unfortunate fact that in many companies, the behavior of the manager behaves more favorably than the shareholders, even though the shareholder is the owner of the company. Why is this happening? In a large, widely owned company, the board – whose fiduciary duty is to protect the long-term interests of its shareholders – is truly management control. Management recommends that the board of directors rubber stamps ineffectively carry out its oversight function. This is the bottom of many corporate scandals over the past decade.
Comparison with privately held companies. Some of these companies may be quite large, but their ownership is not very fragmented compared to a publicly held company. In such companies, companies operate things for the benefit of their owners, who often sit on the board. The board of directors is not management, management is a prison of the board – this is due. In such a company, you'd better believe high dividend payments are part of the owner's deal. Dividends return far more on corporate profits than repurchases. There is no need to provide any revenue for the current operation or expansion and direct remittance to the owner. If you are the sole owner of the company, are not you going to do anything?
So, if one of your investment objectives is current income, it should now be obvious that dividends are preferable to stock repurchases. They often (often increase); they are in the form of cash, that is, immediate income; they are taxed at low rates; they do not need you to sell the stock in order to achieve to pass to you the "valuable things." In addition, management's strong dividend program indicates that the company is working for its owners' benefits rather than management. Management may make more informed decisions with retained earnings (after paying dividends), which will only benefit you as a long-term shareholder.