share repurchase question

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It says in LOS 47 f. that a cash dividend and a share repurchase of the same amount are equivalent in terms of the effect on shareholders wealth. I get that the same amount of cash is being paid out to the shareholders, but wouldn't a shareholder be more well off being paid a cash dividend because they keep the ownership of the stock this way, with room for the price to grow, and at the same time still get the cash dividend paid to them? Or maybe I'm just not understanding the actual meaning of "shareholders wealth" here. Any ideas? Thanks.

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发表于 2011-9-23 18:06 | 只看该作者

Usually when shares are repurchased the remaining shares have values increased of the same amount as of the cash dividend paid. You can understand it in this way that when a stock dividend is announced the total wealth remains same but the individual stock's value decrease. In the same way when shares are repurchased the individual stock's value increases with the same effect as of paying the cash dividend (assuming tax treatment is same). Why companies opt for share repurchase is because in this way the shareholders do not 'expect' the companies to pay the dividend in upcoming years. Especially in US if a company pays a dividend it becomes a kind of a norm and shareholders and other people tracking the company start to expect. If expectations fall the result is evident in the price of the stock in the market. That's why companies opt for stock repurchase.

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