what are advantages and disadvantages of share repurchase vs cash dividends? is it only taxation and signals?
maybe the clientele effect also comes into it?
won’t it affect the ROE differently?
share repurchase “looks positive” to investors, so i think its the clientele effect. i think the ROE effect is dependent on if there is a borrowing involved in the share repurchase. cash dividends will remain unchanged i think as income drops due to the cash outflow and equity drops by the equal amount.
repo changes capital structure, increasing leverage. it’s considered much more optional than regular dividends; your stock price will get whacked more if you curtail a dividend than a buyback program. investors much, much prefer repo’s to dividends due to tax & flexibility considerations. CFOs prefer the EPS uplift of a repo. significant dividend increase generally suggests a shift in investor base (clientele). all in all, returning capital to shareholders is almost always better done by repo. Sole exception is closely held firms where a dividend to the owners may achieve some kind of preferential tax treatment, but LOS won’t go into that. BTW, the context here is surplus cash on the b/s. borrowing normally isn’t involved if the alternative is regular dividend; the former would be a levered recap, which isn’t done via dividends.
If you mean “special” cash dividends (i.e., those that are paid out once) and share repurchase plans, I don’t think there is much difference even in signalling (though there obviously is in taxation to individual investors). Raising the dividend is a different choice than share repurchase because it gives you the choice of lowering the dividend in the future (almost always a bad sign) or continually paying out at that high level. As a cynic, I think share repurchase programs are excellent signals that the company is doing its darndest to fight dilution caused by excessive option grants to its executives.