What are the advantages of share buybacks?
There are a number of advantages for small businesses with share buybacks. Click on the dropdowns to read more.
Rectifies the shares’ value
As outlined above, one of the main benefits to share buybacks is that they can be used to bring up the value of an individual share. For many businesses, this can be seen as rectifying the value of the shares to what they should be by reducing the number of shares that are available.
This can be a positive sign that the company is confident about the business and its future.
Tax-effective rewards for shareholders
Shareholders that are paid in dividends will be taxed on the capital that they have gained on them at the time of being awarded them. This, however, is not the case with share buybacks. In the situation of share buybacks, the shareholders are not taxed until the shares are sold – according to the value of the share at that time.
Cash stays within the business
When a business pays out dividends to its shareholders, they need to pay them with cash. This can have an effect on cash flow or money that could otherwise be reinvested into the company. This is why share buyback can be a good option, especially for small businesses that are looking to grow in size.
What are the disadvantages of share buybacks?
There are, of course, some disadvantages of share buybacks compared to paying dividends to shareholders for small businesses. Click on the dropdowns to read more.
Although businesses can often help to increase the value of their shares, this is not necessarily always the case. A share buyback is a risk, and there is a chance that the value of the share can go down and shareholders not be rewarded at all.
Lack of visibility
One of the main advantages of paying dividends is that the information about them is reported and available on corporate investor relations and financial websites. Share buyback details are difficult to find – although possible at times.
Some people believe that share buybacks can actually give an unrealistic share value. This is because the price of the shares has not risen naturally, but, instead in a more contrived manner.