Which reason might make a company prefer share repurchases over issuing dividends?

A company might prefer share repurchases over issuing dividends primarily because share repurchases can counteract dilution from stock compensation. When a company issues stock options or employs other stock compensation strategies for employees, it increases the total number of shares outstanding. This dilution can negatively impact existing shareholders as their ownership percentage and earnings per share may decrease.

By repurchasing shares, the company can buy back some of the shares that were issued for compensation, effectively reducing the total shares outstanding and helping to mitigate the dilution effect. This can create a more favorable situation for existing shareholders, as it can help maintain the value of their investment, as well as potentially improve earnings per share.

In contrast, dividends do not address dilution nor do they provide the same flexibility as share buybacks. When a company opts for dividends, it commits to distributing a portion of its earnings to shareholders regularly, which does not help with managing share count and can place a recurring financial obligation on the company. Thus, companies may opt for buybacks as a strategic measure to enhance shareholder value while managing their equity structure more effectively.