1. Introduction

In this section, we look at important considerations in the firm's decision about how to return capital to its shareholders. More specifically, we discuss the advantages and disadvantages of dividends and buyback with respect to the following dimensions:

  • Flexibility
  • Number of shares and earnings per share (EPS)
  • Stock valuation
  • Executive compensation
  • Offset to ownership dilution
  • Tax considerations

  

As we will see, share buybacks offer several advantages over dividend payments.