Question

How are share repurchases an alternative to dividends, and why might investors prefer them?

Answer 1

Share repurchases refer to buy back of shares from the stockholders by the company. Share repurchase is often an alternative used by companies instead of paying dividends. Dividends are paid out of surplus profits and repurchase is also made out of free reserves and surplus available with a company. Investors may prefer the buyback due to the fact that major buybacks are done at a premium and an investor stands to gain on the transaction if the stock price is undervalued. Also , companies engage in a buyback when the financial position looks bleak and it wants to improve financial ratios. In such case , the investors would prefer a buyback since the future of the company is uncertain and would not want to risk.