Stock repurchase may be viewed as an alternative to paying dividends in that it is another method of returning cash to investors. A stock repurchase occurs when a company asks stockholders to tender their shares for repurchase by the company. There are several reasons why a stock repurchase can increase value for stockholders.

First, a repurchase can be used to restructure the company's capital structure without increasing the company's debt load. Additionally, rather than a company changing its dividend policy, it can offer value to its stockholders through stock repurchases, keeping in mind that capital gains taxes are lower than taxes on dividends. Advantages of a Stock Repurchase Many companies initiate a share repurchase at a price level that management deems a good entry point.

This point tends to be when the stock is estimated to be undervalued. If a company knows its business and relative stock price well, would it purchase its stock price at a high level? The answer is no, leading investors to believe that management perceives its stock price to be at a low level. Unlike a cash dividend, a stock repurchase gives the decision to the investor. A stockholder can choose to tender his shares for repurchase, accept the payment and pay the taxes.

With a cash dividend, a stockholder has no choice but to accept the dividend and pay the taxes. At times, there may be a block of shares from one or more large shareholders that could come into the market, but the timing may be unknown. This problem may actually keep potential stockholders away since they may be worried about a flood of shares coming onto the market and lessening the stock's value. A stock repurchase can be quite useful in this situation.

Chapter Dividends, Stock Repurchases, and Payout Policy

Disadvantage of a Stock Repurchase From an investor's perspective, a cash dividend is dependable; a stock repurchase, however, is not. For some investors, the dependability of the dividend may be more important. As such, investors may invest more heavily in a stock with a dependable dividend than in a stock with less dependable repurchases. In addition, a company may find itself in a position where it ends up paying too much for the stock it repurchases.

On June 10, a major hurricane damages the company's primary operations. Overall, stockholders who offer their shares for repurchase may be at a disadvantage if they are not fully aware of all the details.

As such, an investor may file a lawsuit with the company, which is seen as a risk. Price Effect of a Stock Repurchase A stock repurchase typically has the effect of increasing the price of a stock. Newco's shares outstanding are reduced to 19, shares 20, x Read more about stock repurchases in Market News That Seems Promising But Isn ' t and Top Perks Warren Buffett Gets When Purchasing Equities.

Dictionary Term Of The Day. A measure of what it costs an investment company to operate a mutual fund. Latest Videos PeerStreet Offers New Way to Bet on Housing New to Buying Bitcoin? This Mistake Could Cost You Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education.

Stock Repurchase By Investopedia Share. Chapter One Chapter Two Chapter Three Chapter Four Chapter Five. Learn what a decline in share repurchases and dividend payouts by corporations means for equity markets, and whether it is a cause for long-term concern.

These 3 Stocks Just Raised Their Dividends -- The Motley Fool

A reverse repurchase agreement is the buyer side of a repurchase agreement also called a repo. Wal-Mart announced huge internal investments along with an aggressive share repurchase program that isn't as good as it initially sounds. Share repurchases can impact investors and companies in different ways.

Along with a Q1 earnings beat, Skyworks announces a newly approved stock repurchase plan.

A repurchase agreement is the equivalent of a short-term collateralized loan. An owner of marketable securities sells those securities to a buyer for cash. As part of the deal, the seller agrees Examine historical buyback data from the financial sector to determine which quarters and companies contributed the most to repurchase activity.

Examine telecommunications sector share repurchase data to identify which companies and catalysts drove buyback trends between and Examine historical share repurchase data for the energy sector. Review buyback activity over time, and find out which companies return the most capital to shareholders. Investment clubs have been around for several decades and are simply groups of people who get together to invest.

Overdraft and credit cards will allow you to spend more money than you have, but whichever option you choose, be sure to Quitting your job does not trigger a taxable event for your k funds unless you elect to cash out your account and take Understand the relationship between a worker's earned income and benefits he or she receives from Social Security in retirement, Content Library Articles Terms Videos Guides Slideshows FAQs Calculators Chart Advisor Stock Analysis Stock Simulator FXtrader Exam Prep Quizzer Net Worth Calculator.

Work With Investopedia About Us Advertise With Us Write For Us Contact Us Careers. Get Free Newsletters Newsletters. All Rights Reserved Terms Of Use Privacy Policy.