The Indian stock market has seen a significant shift in recent years in the way corporates reward their shareholders. To top it up, the benchmark indices Sensex and Nifty have grown over 20% in the last one year (from 10 September 2023-2024), as per data available on the BSE website.
Keeping this in mind, share buybacks and stock dividends are some of the preferred choices of shareholders to generate income, especially in the long term.
So, without further ado, let’s focus on the key differences between dividends and share buyback announcements by companies.
First and foremost, we need to understand why companies announce dividends or propose to buy back their shares at a premium from shareholders.
Companies take the route of stock dividends or share buybacks when they have excess cash. Another aim is to unlock value for shareholders. While dividend payments are the traditional way to return cash to shareholders, there are advantages to stock buybacks too. Here’s an overview to assess which might be better for you as an investor.
Dividend: A Steady Income Stream
Dividends are regular payments made by a company to its shareholders from its profits. They are usually distributed as cash, but can also be in the form of additional shares (stock dividends).
These are typically paid quarterly, but some companies may pay annually, semi-annually, or on a different schedule. Dividends provide shareholders with a direct return on their investment and are often seen as a sign of the financial health and stability of the company.
Buybacks: Enhancing Shareholder Value
Share buybacks, also known as stock repurchases, occur when a company buys back its own shares from the market. This reduces the number of outstanding shares and can lead to an increase in earnings per share (EPS) and a potential rise in the stock price.
Buybacks offer companies flexibility. They can be executed as part of a broader strategy or in response to market conditions, without the ongoing commitment required for regular dividends.
They can help offset the dilution of shares caused by employee stock options or other equity-based compensation, maintaining shareholder value.
What’s better?
After going through the differences and benefits of both financial tools, your next focus should be to evaluate a company for investments based on its history of announcing dividends or opting for buybacks. The factors you may consider while choosing a company may include your investment goals, tax situation, and market conditions.
If you rely on your investments for regular income, dividends might be more suitable, but if you are more focused on long-term capital appreciation rather than immediate income, you could consider buybacks.
Your choice can also depend on the company’s financial health and market conditions. Companies with strong cash flows and stable earnings might offer dividends, while those with excess cash and a belief that their stock is undervalued might prefer buybacks.
In conclusion, there’s no one-size-fits-all answer to whether dividends or buybacks are better, however, this article should have helped you make an informed decision while evaluating stocks of a company.