When a company generates a profit and accumulates retained earnings (or spare cash), it can channel the cash back into the business to fund the operation or it can return the cash to its shareholders in one of two ways – by paying dividends or by repurchasing shares. A dividend is a share of the profits that a company pays to its shareholders. A share repurchase, on the other hand, involves a company buying back shares that were previously sold in the market to members of the public. The repurchase action reduces the number of remaining shares in the market, with the result that each shareholder is left with a larger percentage ownership in the business.

The question can be asked: Which is the better method – dividends or share repurchases? It depends. Both have benefits and drawbacks; but, perhaps more importantly, companies’ individual circumstances are a key factor in whether a share repurchase is preferable to a dividend, or vice versa.

‘A share repurchase involves a company buying back shares that were previously sold in the market to members of the public.’

Share repurchases have become the globally preferred capital distribution method, with the appeal of dividends trailing somewhat behind. Not only is share repurchasing generally a more tax-efficient method of rewarding shareholders, it can also positively impact earnings per share (EPS) and the share price. Share repurchasing is a relatively new concept in South Africa, having only been given the green light in 1999. Although research on share repurchasing in South Africa is limited, there is evidence that it has become a popular pay-out method and in fact broadly mirrors the share repurchase experience of developed countries. After all, while South Africa’s economic performance has been hampered by slow growth and high unemployment, the country nevertheless has a sophisticated financial sector and a stock exchange that is comparable to those in more advanced economies.

Concerns have been expressed, however, that companies seem to be focusing on the short-term benefits of share price manipulation at the expense of the longer-term benefits to be derived from a carefully conceived investment strategy, which would contribute to more sustainable growth for the companies concerned and the economy as a whole. Studies have been conducted in different parts of the world on the determinants of choice between dividend payments and different types of share repurchase, with ownership structure, size of the distribution and share price performance emerging as particularly influential.

‘Dividends are a mechanism whereby profits are returned to all shareholders, whether they need the money or not. With share repurchasing, however, shareholders decide whether or not they wish to participate in the arrangement.’

This study set out to ascertain the most significant determinants of companies’ choice between dividend payments and share repurchases with a view to revealing whether the opportunity to manipulate the share price in the short term is the main underlying motivation. To arrive at an informed conclusion, a literature review was conducted complemented by a practical study involving the analysis of a range of dividend payments and share repurchase transactions among a sample of JSE-listed companies.