An Argument in Favor of Share Repurchase

A share repurchase occurs when a company buys back a portion of their outstanding shares from the marketplace. Some people look at this as a negative situation. However, there are some definite benefits of this strategy as well. A share repurchase could take place in a few different ways. A company could go out into the market and purchase a certain amount of shares through the traditional means. They could also use a tender offer. A tender offer is when a company will advertise that they are buying back shares. They will typically pay a premium. They will buy a specific amount of shares with either option.

Share Repurchase or Dividends

When a company has excess cash, they can do a few different things with it. They could use it to buy back shares or they can distribute it to the existing shareholders in the form of a cash dividend. Some investors would prefer to get a dividend payment from the company. However, this may not always be in your best interest as an investor. If a company uses the excess money to purchase shares in the market place, you will benefit as well. When this happens, the value of the remaining shares in the market will increase. This means that you will be able to realize capital appreciation in your investment. 

When a company reduces the amount of outstanding shares in the market place, it improves the financial ratios of the company. This makes it a more attractive investment to investors and the price of the stock will increase as a result.

When you compare the difference between capital appreciation and receiving a dividend, you need to think about the impact of taxes. If you hold a stock for over a year, you are only going to have to pay 15 percent tax because of the long-term capital gains tax rules. If you get a dividend, you will usually have to pay taxes at your regular marginal tax rate. If you are in the highest income tax bracket, this means that you will have to pay 35 percent on the amount of money that you receive. Therefore, you are going to have to pay more money if the company decides to issue dividends than if they put the money into a stock repurchase. 

Stock Option Programs

Many companies will pursue a share repurchase in order to negate the effects of an employee stock option program. An employee stock option program is essentially creating more shares of stock in the company. This dilutes the market and makes your shares worth less money. By utilizing a share repurchase, the company can make up for the effect of the stock option program and increase the value of your investment.

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