What Do Share Buybacks Mean for Investors?

LONDON -- Share buybacks seem to be all the rage these days, so Andy Paul sat down with Nate Weisshaar to find out what it means for him as a shareholder in Vodafone (LSE: VOD  ) (NASDAQ: VOD  ) . Watch the video below to find out why Nate is less than thrilled when companies like Next (LSE: NXT  ) choose to buy back shares as opposed to paying a larger dividend.

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  • Report this Comment On December 09, 2012, at 12:01 PM, tk77mann wrote:

    There are lots of Foolish reasons for a company to buy back shares (even if its share price is at an all time high) in lieu of increasing the dividend.

    If there is a surplus of cash, the future earnings will support the current dividend without using the cash, and there are few perceived opportunities for new growth that would need the cash, then a one-time share buyback might make sense if the share price has a low valuation (even if it is at a high price).

    Or if there is a high tax rate on dividend payments (like may be coming to the U.S. after January 1), then share buybacks will increase the remaining shareholders EPS and most likely their share prices. Then the shareholders can sell their shares for a lower taxed capital gain, rather than a higher taxed dividend payment.

    Or, since the stock market likes regular increases in dividend rates, if a company board does not see much future earnings growth and they believe the share price is undervalued, then they might decide to buy back shares to avoid future disappointment with the stock if the dividend is kept constant after a one-time dividend increase.

    There are lots more logical and positive reasons for a stock buyback versus increasing the dividend, but to only present the skeptical reason alone (management generating higher pay for themselves due to higher EPS) is Foolish indeed. And not in a good way.

    tk

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