Dividends vs. share buyback: What delivers more value?

Apple shareholders are confronting a financial dilemma after the company — which holds one of the world’s largest cash reserves at more than $165 billion — announced a $90 billion share buyback program while keeping its quarterly dividend unchanged at $0.24 per share.

The move has sparked debate among investors. Some argue that allocating such a large amount of cash to buybacks will boost the share price and lift earnings per share over the long term, while others question why Apple continues to avoid higher dividend payouts given its strong cash flow.

Apple’s shares climbed about 45% in 2023, supported by the buyback program, yet some long-term investors — particularly pension funds seeking steady income — believe the direct cash return has become too small.

Apple’s situation is not unique. Shareholders of other tech giants such as Meta, Alphabet, and Microsoft face a similar trade-off, as these firms have funneled hundreds of billions of dollars into stock repurchases while maintaining relatively modest cash dividends.

In recent years, investors have paid closer attention to corporate payout strategies, as global liquidity surged and companies posted record levels of free cash flow, leaving them with multiple options for capital deployment.

Firms now face a strategic choice — whether to reward shareholders through immediate cash dividends or pursue share buybacks that could enhance long-term value.

Guaranteed income or bets?

In 2024, companies in the S&P 500 index returned roughly $1.6 trillion to shareholders through a mix of dividends and buybacks — including a record $942.5 billion in repurchases and $629.6 billion in cash dividends.

Cash dividends remain the simplest and most predictable form of shareholder return, providing a steady, guaranteed income stream that appeals to pension funds and conservative investors seeking stability.

While cash dividends offer investors a guaranteed income, they often come at the expense of flexibility. Companies that commit to steady payouts can find themselves locked into maintaining them even in leaner times, as any reduction is typically viewed by markets as a negative signal about performance.

On the other hand, share buybacks are a bet on the future. When management believes a company’s stock is undervalued, repurchases can boost earnings per share (EPS) by reducing the number of outstanding shares—thereby lifting the stock price and performance metrics.

Dividends vs. Share Buybacks

Some jurisdictions also favor buybacks through tax advantages, shaping investor preferences.

In the US, dividends are taxed as income in the year paid, whereas capital gains from buybacks are taxed only upon share sale.

According to estimates by the US Joint Committee on Taxation, the tax advantage for buybacks remains around 5–8% compared with cash dividends.

This makes buybacks particularly appealing to institutional investors and hedge funds, who value tax efficiency and the ability to time profit realization.

Individual investors, by contrast, often prefer steady dividend income for its predictability and security.

Which Option Better Serves the Company?

Buybacks provide management with discipline and flexibility — they can be timed to market conditions, executed when cash surpluses arise, and paused if liquidity tightens.

Dividends, by contrast, tend to become a fixed commitment that’s difficult to reduce without spooking investors.

A case in point: AT&T struggled after maintaining high dividends despite falling earnings, ultimately cutting payouts in 2022, a move widely seen as a sign of financial strain that briefly pressured its stock.

Meanwhile, MSCI US index data show that firms with consistent and disciplined buyback programs — such as Microsoft and ExxonMobil — have outperformed peers focused mainly on large dividends without repurchases.

In Q4 2024, S&P 500 companies spent about $243 billion on buybacks, compared with $168 billion in dividends, underscoring the corporate tilt toward repurchases as a more flexible way to return value amid strong cash flows and limited new investment opportunities.

When cash flows are strong and growth opportunities scarce, buybacks often deliver higher shareholder value by enhancing EPS and reducing dilution.

However, when a company needs to fund new projects or reduce debt, dividends can become a burden that limits financial agility if not managed carefully.

Market Perception: Dividends vs. Buybacks?

An increase in dividends is often interpreted as a signal of financial strength and management confidence in sustaining profitability.

Buyback programs, in turn, convey confidence in the company’s valuation, though in some cases they may be viewed skeptically as a short-term tool to boost executive-linked EPS metrics.

Overemphasis on buybacks, especially at the expense of R&D or long-term expansion, can suggest management’s preference for short-term returns over sustainable growth.

By contrast, consistent dividends enforce discipline and long-term credibility, aligning well with investors seeking income and stability.

Ultimately, there’s no universal winner between dividends and buybacks.

The key lies in a balanced capital allocation strategy that integrates returns, liquidity, growth, and governance in line with the company’s financial outlook and stage of maturity.

For income-focused investors, particularly in low-growth firms, dividends remain the preferred and reliable option.

For mature companies with strong cash flows and limited growth prospects, buybacks often create greater long-term value — as seen in 2024, when total S&P 500 buybacks reached a record $942.5 billion.

Still, boards must balance sustainability, transparency, and discipline.

Buybacks may lift profitability metrics temporarily but risk masking underinvestment, while dividends enforce a recurring commitment that can strain flexibility.

The best shareholder return, therefore, comes when capital distribution aligns with strategy and real value creation — not merely as a cosmetic boost to financial performance.

Sources: S&P Dow Jones Indices, S&P Global, First Trust, FT Portfolios, Janus Henderson, Boston Partners, Morgan Stanley Capital