Reading: Dividends vs. Share Repurchases

The takeaways from these considerations are rather straightforward:

• For each dollar distributed as dividends, shareholders receive \( (1-\tau_D) \) after taxes. In our example, that was 85 cents.
• In contrast, for each dollar distributed in a buyback, shareholders receive \( (1-\tau_G \times (1- \frac{P_B}{P_R})) \) after taxes. In our example, that was 96.25 cents.
• Therefore, repurchasing shares instead of paying dividends leads to tax savings of 11.25% for the participating shareholders in our example. Given a total payout of 106'820 before taxes, the tax savings associated with share buybacks amount to 12'015.
• This shows (again) that different forms of payout can have substantially different tax implications for the participating shareholders.

Management Implications:

• Ignoring all other aspects and focusing solely on taxes, firms should pay dividends if \( \tau_D < \tau_G \times (1- \frac{P_B}{P_R}) \)
• Otherwise, they should repurchase shares.
• Because the dividend tax rate is often actually larger (or at least not smaller) than the capital gains tax rate, tax considerations clearly favor repurchases.