(8) Alternative Way Of Cash Distribution To Existing Shareholders
It is one of the main objectives of company’s stock buyback plan. Every business organization is perhaps doing business simply to generate profits.
These profits need to be reinvested in other profit generating business opportunities. However, companies can also distribute surplus funds either partially or completely among current shareholders.
This can be done through dividend payouts and/or share buybacks mechanism on a regular basis. Mostly, companies prefer to payout cash in form of dividends on regular basis.
But, when surplus funds are accumulated then they may go for shares buyback instead of paying higher dividends. This is usually done to control the shareholder’s expectations from going up in coming future.
On the other hand, dividends are often considered as a long-term commitment. Once you start paying a dividend one year, shareholders tend to expect a similar form of dividend next year.
If a company defers dividend payout in future years then it will send a negative signal to the markets. Therefore, company management hesitates to commit a higher dividend.
It is particularly true when future cash position is uncertain in a competitive business scenario. Thus, companies prefer to distribute ordinary profits in form of dividends while surplus funds in form of share buybacks.
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(9) Managing Equity Dilution Ahead Of Stock Conversions Or Stock Options
It is one of the most significant objectives of company’s stock buyback plan. Equity dilution is not a new thing in stock market.
It happens whenever new equities are issued to new investors, or current shareholders. For example, equity dilution due to conversion of warrants or bonds into equities at the time of maturity.
Sometimes, equity dilution can also happen due to exercising of employee’s stock option plans (ESOP). These forms of equity dilutions tend to have a negative impact on the earnings per share due to increase in the number of outstanding shares.
Simultaneously, shareholding pattern of existing shareholders is also reduced. Therefore, in order to compensate for this negative effect on existing shareholders, companies decide to go for share buybacks.
These share buybacks when done on time can reduce the impacts of equity dilution to some extent. However, final outcome of a buyback strategy depends on the proportion of shares repurchased as compared to number of new shares issued.
- Reasons Behind Company’s Buyback Offer: Shutterstock