ACCA Advanced Financial Management (AFM) Practice Exam 2025 - Free ACCA AFM Practice Questions and Study Guide

Companies often prefer stock repurchases over maintaining high dividend payments for several strategic reasons, one of which is to avoid the implications of committing to high, consistent dividend payments. When a company increases its dividend, it sends a signal to the market about its ongoing ability to generate sufficient cash flows. However, if the company faces unexpected downturns or cash flow issues in the future, it may be difficult to reduce or suspend those dividends without negatively impacting investor perception and stock value.

Stock repurchases provide a more flexible option. By buying back shares, a company can return value to shareholders without the long-term commitment that dividends entail. This also allows management to adjust the timing and scale of repurchases based on cash availability and market conditions, ensuring they do not overcommit resources when circumstances change. This flexibility can prevent the negative consequences associated with cutting dividends, making stock repurchases a strategically favorable option in uncertain or volatile environments.