Alternative to the payment of cash dividends, the company may purchase the shares back. Purchase of shares outstanding can be done through the secondary market Stock Exchange. Shares purchased are included in treasury stock account. Theoretically, the value of the company before and after the purchase of shares will be the same again.

The Advantages of Stock Repurchases

• Buying back shares could save on taxes.
• Announcement of buy-back could be considered a positive signal by investors, because Stock repurchases often driven by the motivation of managers who assume that the undervalued stock price (lower than they should).
• Payment of dividends is usually done with a stable pattern.
• Shareholders have the option to Stock Repurchases. When need cash, they can sell the shares they acquire. Conversely, if do not need cash, or evading taxes, they can invest back into the company stock.
• In some specific situations, Stock Repurchases done selectively

The Disadvantages of Stock Repurchases

• The shareholders may have different preferences between cash dividends and Stock Repurchases (profits derived from capital gains). Cash dividends tend to be ‘unreliable’ because it gives a clear income (cash received), and relatively stable.
• The Company may pay the repurchase price is too high, to the detriment of current shareholders (who still holds the shares).
• Shareholders who sell their shares may not know exactly the implications and the Stock Repurchases program effects. If it turns out to feel aggrieved, they can sue the company.