When a company pays a dividend, all shareholders must pay taxes on the dividend. When a company makes a stock repurchase shareholders have the option of selling. They can thus chose to avoid paying taxes. Signaling Managers can signal their belief that the stock is undervalued by buying it. Flexibility Dividends are hard to cut.
Stock buybacks offer the management more flexibility in the size and timing of the trades.
Stock Option plans An often overlooked reason for many buybacks is to fund employee stock ownership plans. The firm buys back shares to give to its employees. This takes some time but is fairly easy and is usually used for relatively small repurchases. Greenmail-this is a targeted repurchase and is usually used to get rid of onerous shareholders. Many shareholders do not like this as the buyback is often done at a premium and the shareholders that are not allowed to participate lose out.