Share buybacks... the alternative to divis

AN ALTERNATIVE way of returning money to shareholders is for a company to perform a share ‘buyback’ – boosting the share price by purchasing some of its shares from shareholders.

This is sometimes done alongside paying special dividends, although special dividends may be considered preferable if the company’s share price is looking expensive.

The decision as to which of these approaches to use – and whether to deploy capital in other ways such as paying down debt or making a contribution to the pension scheme – is often taken after consulting with major shareholders.

Laith Khalaf, financial analyst at investment broker AJ Bell, says: ‘There are reasons why you might prefer a special dividend as an investor as it’s a bird in the hand as opposed to a more intangible rise in the share price triggered by a buyback scheme.

‘But with share buybacks, you have greater control over when you take profits because you can decide when to cash in the shares. A special dividend is subject to income tax at the point it is paid to you, and this could lead to tax implications unless it is held in a tax shelter, such as a pension or Isa.

‘Gains in the share price resulting from buybacks are, on the other hand, subject to capital gains tax when shares are sold, which can be avoided by making use of the generous exemption allowance, which currently stands at £12,300.’