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When a company is profitable and generating substantial positive cash flow, is it better from the company's perspective to have a dividend increase, or institute a share repurchasing program? From an individual investor's perspective, would it be any different? i.e. which would an individual prefer, and why?

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In some sense, the share repurchasing program is better if the company does not foresee the same profit levels down the road. Paying a dividend for several years and then suddenly not paying or reducing a dividend is viewed as a "slap in the face" by investors. Executing a share repurchase program one year and then not the next is not viewed as negatively.

From an investor's standpoint, I would say a dividend is preferred over a share repurchase program for a similar reason. Typically companies that pay a dividend have been doing so for quite some time and even increasing it over time as the company increases profits. So, it can be assumed that if a company starts paying a dividend, it will do so for the long-run.

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I feel dividends are better for shareholders. The idea behind buy backs is that future profits are split between fewer shares, thereby increasing the value (not necessarily price -- that's a market function) of the remaining shares.

This presupposes that the company then retires the shares it repurchases. But quite often buybacks simply offset dilution from stock option compensation programs. In my opinion, some stock option compensation is acceptable, but overuse of this becomes a form of wealth transfer -- from the shareholder to management. The opposite of shareholder friendly!

But let's assume the shares are being retired. That's good, but at what cost? The company must use cashflow (cash) to pay for the shares. The buyback is only a positive for shareholders if the shares are undervalued.

Managers can be very astute in their own sphere: running their business. Estimating a reasonable range of intrinsic value for their shares is a difficult, and very subjective task, requiring many assumptions about future revenue and margins. A few managers, like Warren Buffett, are very competent capital allocators. But most managers aren't that good in this area. And being so close to the company, they're often overly optimistic. So they end up overpaying.

If a company's shares are worth, say, $30, it's not unreasonable to assume they may trade all around that number, maybe as low as $15, and as high as $50. This is overly simplistic, but assuming the value doesn't change -- that the company is in steady-state mode, then the $30 point, the intrinsic value estimate, will act as a magnet for the market price. Eventually it regresses toward the value point. Well, if management doesn't understand this, they could easily pay $50 for the repurchased stock (heck, companies routinely just continue buying stock, with no apparent regard for the price they're paying). This is one of the quickest ways to vaporize shareholder capital (overpaying for dubious acquisitions is another).

Dividends, on the other hand, require no estimates. They can't mask other activities, other agendas. They don't transfer wealth from shareholders to management. US companies traditionally pay quarterly, and they try very hard not to cut the dividend. Many companies grow the dividend steadily, at a rate several times that of inflation.

The dividend is an actual cash expenditure. There's no GAAP reporting constructs to get in the way of what's really going on. The company must be fiscally conservative and responsible, or risk not having the cash when they need to pay it out. The shareholder gets the cash, and can then reinvest as he/she sees fit with available opportunities at the time, including buying more shares of the company, if undervalued. But if overvalued, the money can be invested in a better, safer opportunity.

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I would prefer a dividend paying company, rather than share appreciation. And I would prefer that the dividends increase over time.

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