Buybacks Or Dividends, Which Is Better

With so much cash on the balance sheet it seems these days you're always hearing about more buybacks or an increased dividend. But which is better? "Companies have become enamored of buybacks as a way to return money to existing shareholders," said Cramer. Sixty companies in the S&P 500 announced share buyback programs worth at least $1 billion in 2012. Within the group, the biggest buying back came from Johnson & Johnson, repurchasing $12.9 billion worth of stock. And although a buyback can drive shares higher, as a strategy Cramer doesn't love it.

If you're a buy and hold retail investor, Cramer feels a buyback could go against you. That's because a buyback gives pros a reason to sell. Confused? The buyback conceivably drives shares higher. And as that happens, pros will often take gains and then put money to work, elsewhere. There's no reward for holding. By comparison, dividends boost return to existing shareholders while simultaneously attracting new buyers. Therefore investors are inclined to hold while new buyers establish positions. Also, "Dividends are a much better sign that the management believes in the future than a buyback because buybacks typically end. Management is typically reluctant to take back a dividend– they are an out-loud declaration of long-term confidence," he said.

Source: CNBC

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