SHARE REPURCHASES ARE A MUCH BETTER MEANS OF DISTRIBUTING FUNDS TO SHAREHOLDERS THAN DIVIDENDSThe emergence of Share Repurchases as an open option to Dividend Pay-outs available to firms in the distribution of earnings to stockholders has been the subject of researches and investigations to determine long-term implication since its popularity has substantially increased only during the last two decades. In 2008, financial economist Douglas J. Skinner published recent results of his study show the growing number of firms listed in the US stock exchange implementing stock repurchases as an indication of acceptance in substitution fore traditional payment of dividends.
In 2004, more than 20 years after stock repurchases were used as scheme to distribute profits repurchases increased to $233 Billion. Stock repurchases surpassed dividends in the years 1999, 2000, 2004, and 2005.This paper builds-up on existing studies and researches and examines the growth of stock repurchases by first describing stock repurchases and establishing the factors for its upsurge in popularity over dividends and evaluates its preponderance in the stock market. Finally an assessment on the impact of stock repurchases on shareholders are cited, and personal insights are likewise offered. How does stock repurchase differ from dividend payments? Investors, investing in public listed companies through the purchase of common stocks at prevailing market rates, expect appreciation of this price in the long haul.
On a continuing basis, they share – based on subscribed volume of shares held- in the retained earnings of a company though annual cash pay-outs or dividends which is the more established manner of pay-out for most publicly-listed corporations. Reports and announcement of level of dividends actually influence market sentiment on a company’s current stock price where positive developments result in upward movement or fall with negative news.
Moreover, it was widely held that dividends were indicators of a firm’s long-term viability, though subsequent studies showed no correlation existed between earnings changes and sign and magnitude of the dividend change (Bernartzi et. al, 1997). Dividends payments are deducted from declarations of retained earnings for the year. Shareholders measure their effective returns by deriving percentage between dividends paid per share over purchased price per share. Dividend declaration and eventual pay-outs may be affected by strategic plans such as capital expenditures - acquisition of equipment, R & D, investments plans and strategic decisions as increasing manpower benefits.
Nevertheless, shareholders may also gauge long-term viability and attractiveness of the company through the prevailing market price in the stock market. On the other hand, share repurchases which gained popularity during the last two decades, is a buy-back concept whereby common stocks held by shareholders are reacquired by the firm at specified points in time at a price based on recent stock exchange listing.
Share repurchases have now been viewed as providing higher returns for investors over dividends because the reduction in share volumes – it is assumed that redeemed stocks will reduce total volume of shares in circulation– will impact to higher stock prices and increase a stockholder’s ownership of a firm. Stock repurchases do not impact into a further erosion of earnings, as these are purely capital transactions resulting in an improved income for a firm.