The problem with the dividend is that it's immediately taxed. That said, if you take taxes aside, it's actually the same either way. This is the crux of the Modigliani Miller theory. [0]
An oversimplified way to look at it...
Let's say a company has 1 million share worth $100, $50 of which is sitting in cash, and wants to return half the value to the shareholders.
One way to do this is via a dividend. Each share is now worth $50, and each shareholder has $50 in cash. (No net gain or loss, but the shareholders can do what they want with the money - the capital is freed)
Alternatively, they can buy back 500,000 shares. Each of the remaining shares is worth the same amount, but $500K of new shares is released to new uses. Same net value as above. No new value is created or left behind, it's just the dividend gives a partial payment on each share, while the buyback gives a full payment on some of the shares.
What IBM does is borrow money rather than pay cash, because they can deduct the interest payments on the debt. (This violates one of the assumptions on the MM theorem)
An oversimplified way to look at it... Let's say a company has 1 million share worth $100, $50 of which is sitting in cash, and wants to return half the value to the shareholders.
One way to do this is via a dividend. Each share is now worth $50, and each shareholder has $50 in cash. (No net gain or loss, but the shareholders can do what they want with the money - the capital is freed)
Alternatively, they can buy back 500,000 shares. Each of the remaining shares is worth the same amount, but $500K of new shares is released to new uses. Same net value as above. No new value is created or left behind, it's just the dividend gives a partial payment on each share, while the buyback gives a full payment on some of the shares.
What IBM does is borrow money rather than pay cash, because they can deduct the interest payments on the debt. (This violates one of the assumptions on the MM theorem)
[0] http://en.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theor...