Dividends and buybacks are functionally equivalent. Think of a company like a short, wide plastic container, half-full of water. Think of the air in the container as being the cash that the company has, and the water as the rest of its value. Each share in the company corresponds to some imaginary vertical slice of the container.
Now, you can apportion the value in the company in a few different ways, but there are two extreme ones:
1. The container is lying flat on the table. Each share has the same proportions of water and air as the others. If everyone's slice of the container is 10% air, you could pay it out to them evenly ("dropping the lid" of the container.) This shrinks the company, but it doesn't shrink the volume of "stuff" that anyone owns, modulo taxes.
2. You tip the container on its side so all of the air goes to one end. If the container is 10% air, now 10% of shares are all air, and the other 90% of the shares have no air at all. If you "paid out" the air now, you're doing a share buyback.
These accomplish basically the same thing for a company -- they have less cash (air) and less market cap (total volume).
They're about the same to the shareholders, too. If I have 10 shares in Yahoo and they use all their cash to do a buyback of 10% of their stock, I can sell one of my shares and be in exactly the same financial situation I would have been in had they decided to pay a 10% dividend (I'd have the same amount of cash, my shares would be worth the same amount, and they'd correspond to the same proportion of the company.)
Now, you can apportion the value in the company in a few different ways, but there are two extreme ones:
1. The container is lying flat on the table. Each share has the same proportions of water and air as the others. If everyone's slice of the container is 10% air, you could pay it out to them evenly ("dropping the lid" of the container.) This shrinks the company, but it doesn't shrink the volume of "stuff" that anyone owns, modulo taxes.
2. You tip the container on its side so all of the air goes to one end. If the container is 10% air, now 10% of shares are all air, and the other 90% of the shares have no air at all. If you "paid out" the air now, you're doing a share buyback.
These accomplish basically the same thing for a company -- they have less cash (air) and less market cap (total volume).
They're about the same to the shareholders, too. If I have 10 shares in Yahoo and they use all their cash to do a buyback of 10% of their stock, I can sell one of my shares and be in exactly the same financial situation I would have been in had they decided to pay a 10% dividend (I'd have the same amount of cash, my shares would be worth the same amount, and they'd correspond to the same proportion of the company.)