The ins and outs … of stock buybacks vs. dividends

Article Excerpt

It’s odd that while investors crave cash dividends, they rarely get excited about stock buybacks. But in some ways, buybacks (or share repurchases) are almost as good as dividends. Stock buybacks have three major advantages: First, stock buybacks raise a company’s earnings per share. To get earnings per share, you divide total earnings by the number of shares outstanding. Share buybacks reduce the number of outstanding shares and that results in higher earnings per share. On the whole, buyers are willing to pay slightly more for a stock with even a minor increase in earnings per share. Second, when the company joins investors in buying its own stock on the market, that higher demand pushes up the price of the stock. Third, buybacks give you a tax-deferral option that you don’t get with cash dividends. Specifically, you don’t realize the capital gain from a resulting rise in the stock’s price until you sell. You always have the option of holding on to your stock…

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