Dividends vs. Share Repurchases: Chubb, Costco, National Presto Show the Differences

Nov. 07, 2010 10:35 AM ETCB, COST, NPK13 Comments
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Dividend Monk
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This is the second in a two-part series on share repurchases. The first post explained how share repurchases work.

Are share repurchases good or bad? The answer, as might be expected, is a bit gray.

Assuming the company has a certain amount of cash they wish to return to shareholders, the two ways they can do it are through dividends and share repurchases. Share repurchases are typically more flexible for the company, while dividends are more flexible for the shareholder.

The basic answer is that share repurchases are great when the share price is undervalued, and not-so-great when the share price is overvalued. To put it into a more useful context, if you would otherwise reinvest your dividends or invest new capital into the company at current stock prices, then share repurchases are useful to you because the company basically does it for you. The alternative is that the company could pay you a higher dividend, but you’d be taxed on that dividend and reinvest it into the company anyway. On the other hand, if you would not reinvest dividends or invest new capital into the company at current prices, then share repurchases are not in alignment with your current outlook, and it would be better for you to receive a higher dividend.

Something else to be considered is that when a company uses money for share repurchases when it could be paying a higher dividend instead, the company’s management is limiting your control and increasing theirs. As a shareholder in a company that makes uses of share repurchases, you have to rely on management’s ability to judge whether it’s an appropriate time to repurchase shares, whereas with your dividend, you have complete control over that choice. The flexibility of dividends for shareholders is great, because if allows you to direct your flow of income to where

This article was written by

Dividend Monk profile picture
1.91K Followers
My name is Mike McNeil and I’m the author of The Dividend Guy Blog along with the owner and portfolio manager over at Dividend Stocks Rock. I earned my bachelor degree in finance-marketing, own a CFP title along with an MBA in financial services. Besides being a passionate investor, I’m also happily married with three beautiful children. I started my online venture to educate people about investing and to be able to spend more time with my family. I used to struggle with the same issues millions of small investors deal with on a daily basis. Which stocks to buy? When to sell them? How to find the time to manage my portfolio? How to diversify? I wasn’t into dividend investing until I looked in depth at my portfolio returns and realized I was having difficulty keeping up with the market. The root of the problem was a very poorly built portfolio that lacked structure and the components required to build a sturdy base. I made good money from the stock market but I was taking unnecessary risk to achieve my investing goals. From that point on, I was determined to create a portfolio strategy that would allow me to benefit from dividend growth stocks as a solid foundation. Since then, I manage my portfolio with a stress free method that enables me to cash out dividend payments even when the market goes sour.

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SymbolLast Price% Chg
CB--
Chubb Limited
COST--
Costco Wholesale Corporation
NPK--
National Presto Industries, Inc.

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