Buybacks and Dividends

Paper Summary:

In this article, the writer notes that stock buy-backs and one-time special dividends have accounted for sixty-three percent of total dividends of companies in the United Kingdom since 2003. The writer notes that ordinary dividend growth has failed to keep pace with earnings growth in the United Kingdom as well as the rest of Europe. The writer discusses that while one would not expect this to be necessarily bad news for the investor, European companies have discovered that their buy-back and special dividend preferences in recent years have failed to boost companies' share prices. As a result, they are now turning back to increasing dividends as the preferred way to return capital to investors This paper discuses the advantages and disadvantages of stock buybacks and dividends so that stockholders can make more informed investment decisions.

Outline:
Introduction
Stock Buybacks
Stock Buyback Advantages
Stock Buyback Disadvantages
Dividends
Advantages of Dividends
Disadvantages of Dividends
Recommendations

From the Paper:

"Stock buybacks improve a firm's financial ratio. Although a stock buyback reduces cash, return on assets increases because the cash component of assets on the balance sheet is reduced. Return on equity increases because there is less outstanding equity. The buyback also helps to improve the company's price-earnings ratio due to the reduction in outstanding share. All of these metrics, particularly the price-earnings ratio, are considered important metrics to judge investment in a company and their improved positions due to the stock buyback may lead to additional stock demand/appreciation. In addition, stock buybacks send a strong signal to the market that a firm's management believes the shares are undervalued."

Sample of Sources Used:

• Buybacks vs. dividends (2006, February 2). Nightly Business Report. http://www.pbs.org/nbr/site/onair/transcripts/060202c/
• Dividend policy. http://pages.stern.nyu.edu/~adamodar/New_Home_Page/lectures/dividend.html
• Hughes, C. and O'Doherty, J. (2007, February 22). Companies put faith in buy-backs and special dividends. Financial Times, p. 22.
• Kennon, J. The benefits of stock buy back programs. http://beginnersinvest.about.com/cs/newinvestors/a/060401a.htm
• Palley, T. (2007, February 19). Expand sarbox. Economist's view. http://economistsview.typepad.com/economistsview/2007/02/thomas_palley_e.html

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