A company can decide whether to distribute dividends to its shareholders or to buy back its shares (i.e., when management considers them undervalued, hoping they will increase in value).
These two are different typologies of return on/of capital for the investors, but let’s see their impact on the company itself.
Dividends can be a one-time or recurring remuneration, depending on the company’s policy
Their distribution has:
✦ no impact on the shares outstanding;
✦ no impact on Earnings per Share ratio or EPS, since they are not included for the calculation of the company’s earnings;
✦ impact on the company’s taxation, since they are not deductible expense.
Buybacks or repurchases reduces the numbers of shares outstanding, so they have an impact on the EPS calculation, which, in this case, go up in value.
It’s not possible to say which kind of remuneration for the shareholders is always better than the other: it depends on many dynamics and mechanisms of the company’s life in some moments.
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