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Buybacks Vs. Dividends

|Includes: Aeropostale, Inc. (ARO)

Many people base a stock purchase solely on a company's dividend payout. I want to help convince all investors to rethink the importance of dividends and show why conservative companies, especially those trading at low valuations, could create much more shareholder value through stock buybacks. The clearest advantage that stock buybacks have over dividend payouts is the lack of double taxation. This keeps more money in your pocket. However, companies must be prudent when buying back shares, since many companies waste money by making repurchases at high valuations. For companies that make purchases at low valuations, though, the benefits of buybacks can be compounded by buying shares at a low price that will be worth much more down the road. Currently, the company that is doing a fantastic job of aggressively buying back shares at a great value is Aeropostale (NYSE:ARO). The company is taking advantage of a relatively weak period, when the stock has stayed at low levels, to buy shares hand over fist. The company currently trades around 9.5 times earnings. By buying back shares at this level, the company is getting a return of roughly 11% on the shares being bought, plus the additional upside as the company's long-term intrinsic value becomes apparent in the coming year. Relating this back to the main theme, I am much more happy as a shareholder that ARO is buying back shares instead of paying out a dividend. This is a perfect template for other CFO's at other publicly traded companies to follow. When a prudent, long-term minded management initiates a stock repurchase program, it is generally in your interest to jump on board.