Dividends are distributed by companies out of their profit after tax. It is a post-tax appropriation. Dividends are cash payouts and to that extent they reduce the value of the company. When we talk of value we refer to the net worth of the company and the market value. Both reduce to the extent of the dividends paid out. Normally, companies that do not have too many investment projects to invest in will prefer to payout the profits as dividends to shareholders. A buyback, on the other hand, is a reduction of capital. In India buying back shares for treasury operations is not permitted, unlike the US. A buyback of shares has to be necessarily for extinguishing capital only. Since buyback reduces the outstanding capital, your profit is distributed across fewer shares and that improves the EPS of the company. Normally, companies that want to give a signal to the shareholders and to the markets that the stock price has bottomed out tend to use the buyback method to reward shareholders.