Returns of capital

Companies that have more money than can be invested at better than market rates, or who can benefit in some way by replacing equity financing with debt, should return capital to shareholders. Common methods of doing this include:

Special dividends are simply dividends that the company calls "special" to make it clear that their payment is not part of the normal dividend stream that the company pays.

Share buy-backs have tax advantages and offer shareholders more flexibility than special dividends.

A company may restructure its share capital or issue redeemable securities to return money to shareholders. This can give shareholders a great deal of flexibility in when and how to take their money. A restructuring may include a cash payout, a share consolidation, exchanging shares for redeemable bonds or prefs, etc.

Substantial share buy backs are often viewed favourably as evidence of a focus by the management on shareholder wealth, rather than on "empire building". The choice of what method to use tends to depend on the amount to be returned and the tax implications for shareholders. The latter, in turn, depend on what sort of shareholders own most of the company.

If shareholders are non-tax payers (e.g. pension funds) a special dividend (which immediately creates an income tax liability) is more likely. If shareholders are largely small shareholders a buy back may be preferable. If the amount to be returned is large then a restructuring may be preferred for maximum flexibility.

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