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Dividend policy

4.2 Share repurchase

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.

If all shareholders agree to the repurchase, both a share repurchase
and a one-off large dividend have the same impact on the cash, and the
gearing of the company.

Advantages of share repurchase

 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 repurchase

 Approval needed in general meeting – more time consuming.

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

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