What is the comparison of a regular cash dividend with a periodic share repurchase. Which has greater appeal?© BrainMass Inc. brainmass.com October 9, 2019, 4:39 pm ad1c9bdddf
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What is the comparison of a regular cash dividend with a periodic share repurchase. Which has greater appeal?
Cash dividends are payment of cash by the firm to its shareholders.
Share Repurchase occurs when firm buys back stock from its shareholders.
Share repurchase can be an attractive alternative to cash dividends. It is attractive for two reasons:
i) It lets the stockholder choose whether to receive the cash (by selling his shares back to the company) or retain his level of ownership (by holding his shares) and
ii) Gains from stocks sold are treated as capital gains (assuming the stockholder has held the stock for more than one year). Investors are taxed at a lower tax rate on capital gains compared to dividends. Moreover, because tax on capital gains is paid when the gain is realized, investors can delay the tax. Paying taxes later is "cheaper" because of the time value of money.
Therefore periodic share repurchase may have a greater appeal than regular cash dividend for the ...
A comparison is made between a regular cash dividend and a periodic share repurchase. Also stock dividends and stock splits are discussed.