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Chapter 5

4.2 Share buyback

An alternative to paying a dividend is to buy back shares.

Used when the company has no positive NPV projects to invest in, so it
returns the cash to shareholders.

Alternatively, a company may decide to use a one-off large dividend to
return surplus cash to shareholders.

Advantages of share buyback

 Choice for investors.

 Lower future total dividends.

 Can change control.

 No change in the share price – paying a dividend would lower the
share price.

 Removes the dividend policy precedent – failing to repeat a large
one-off dividend can send the market a negative signal.

Disadvantages of share buyback

 Approval needed in general meeting – more time consuming.

 Difficult to set a fair price for the buyback – company will hope for
a lower price whereas shareholders will hope for a higher price.

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