Showing posts from July, 2012

The Difference Between Share Buy-Backs and Dividends

I get a lot of questions from confused investors wondering what the differences are between share buy backs and dividends. Simply put, the company uses existing cash for both purposes, the difference is that dividends go directly into your pocket, which you have to pay taxes on, while the share buyback goes to purchasing shares on the open market, which are then retired after purchase. This action reduces the number of shares outstanding, so profits are then divided amongst fewer shares. Example, a company has 100 shares outstanding, and earns $100. That would be earnings of $1 per share. ($100 divided by 100 shares outstanding) Now, the company uses existing cash to purchase 20 shares, reducing the number of shares to 80, now the same earnings are divided by 80, so you get earnings per share of 100/80 so you get earnings of $1.25 share. Of course, with rising earnings per share, the stock price rises accordingly. Also, with a share buy back, taxes are deferred until you sell the s…