Dividends and buybacks split investors. Both are a form of cash return to shareholders, but both also have their drawbacks. Company executives view these two methods of cash return very differently and are often unsure which is the best strategy to adopt.
Three ways to return cash
When it comes to capital returns, a company should retain its earnings if it can earn a rate of return that is above the cost of capital. But if shareholders can earn a higher rate of return on capital than the company can, the firm should disburse the cash.
There are three ways a company can transfer cash to its shareholders:
- The company can sell itself for cash. Rewards all shareholders.
- A company can pay a dividend. Rewards all...
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