When a company you have invested have excess free cash flow, do you prefer that they use the excess cash to buyback shares from the market or give them out as special dividend?This is especially true in the case when good investment opportunities are not readily available.
The way I see it, engaging in share buyback reduces the amount of outstanding share in the market and hence will lead to an increase in eps. However, there is a danger that this may be used to mask a stagnant performance by dressing up the eps by the management. In addition, it is possible that the company could have given out substantial share options to employees earlier at a lower price. ( Singpost given out 800K share options at $1.02 in Jan. It then subsequently does a share buyback of around 10M shares at around 1.12/1.13 about 2 months ago). It is able to do so probably by taking advantage of the low interest rate for debt by raising $200M in Fixed Rate Notes which bear an interest of 3.5% per annum). I am of the opinion that the recent improvement in singpost share price has less to do with any significant improvement in business outlook than to mere finance rejiggering.
By giving out special dividends, it basically return the excess cash to to shareholders an let them decide what to do with it.
As a retail investor, I prefer special dividend anytime as I can decide what to do with it.
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