Repurchase or Dividend Payment

The company if having made a huge profit and is left with huge cash after paying the tax and debts can either share the profit with the investor or invest in other fresh new projects. There are two way of sharing the profit with the investor it is either repurchase of the shares or giving off dividend. Most of the companies go in for reinvestment; some of the companies go for repayment or dividend pay off. In case of dividend payoff the company gives a particular amount to each share. The investor gets the amount multiplied by the number of shares he/she is holding. In case of share repurchase the company buys back the shares outstanding in the market thereby increasing the EPS value of the share.

Benefits of these two processes from an investor point of view are,

In case of dividend payment the investor gets an annual regular income.  This dividend payment by the company makes more investor to buy such stock there by increasing the demand in the market for these stocks which pay regular dividend. Many company offer dividend reinvestment plan wherein the portion of the dividend allotted to the investor is invested by the company in a new project thereby increasing the face value of the share that the investor holds.

In a share repurchase plan the company pays the shareholder an amount which is more than the market price in which the share is trading during the announcement. This makes the investor to sell their shares.

Some of the consideration an investor must have before making decision on the purchase of the shares based on dividend expectations are,

It’s not mandatory for a company to give dividend every year. Even bigger blue chip companies at time fail to give dividend when they have a bad quarter. Share buy back or share repurchase are usually one time offer. Company does not do this very often. Investor should not have an opinion that the company will buy back its shares quite regularly. Dividend and share repurchase are subjected to taxing, investor must keep that in mind while investing.

Question

• What are the various advantages of repurchase of shares or dividend payment from an investor point of view?
• What are the considerations the investor must have before making investment decision based on past dividend payment of the company?