options thread

Doug Henwood dhenwood at panix.com
Wed Apr 5 14:02:08 PDT 2000

Rakesh Bhandari wrote:

> >
>> The numbers I was citing are based on the market averages, so they're
>> not per capita.
>Doug, just want to focus on the surreal aspect of the stock market you
>emphasize--that it's an institution that retires more stock than it
>offers. So if there is enough buy back, then earnings growth on remaining
>shares can race ahead of GDP growth, right? Don't hesitate to tell me
>if I am way off.
>Investors don't want highly taxed pay outs, they want dividends to be used
>for share retirement, if not investment, right? All this means explosive
>capital appreciation of outstanding shares, no?

But, as the geezers sang, you can't always get what you want.


>Share Repurchases and Employee Stock Options and their
>Implications for S&P 500 Share Retirements and Expected Returns
>J. Nellie Liang Steven A. Sharpe
>We estimate the effects of share repurchases and employee stock
>option exercises on net share retirements for large S&P 500
>companies. We find that, over the past five years, gross repurchases
>have reduced shares outstanding 2 percent annually; but, owing to
>the exercise of employee stock options, only about half of those
>shares were actually retired. Given the recent pace of employee
>stock option grants, and assuming that equities continue to be
>priced at about 30 times earnings, our analysis suggests that the
>pace of net share retirements will fall well below the pace of the
>last few years, unless corporations use nearly all their earnings to
>fund shareholder payouts. Moreover, over the long haul, assuming
>corporations need to retain 40 to 50 percent of their earnings to
>invest and grow at historical rates, the long-run average pace of
>net share retirements is likely to fall to 1/2 percent or less.

>Now you are saying that for continuing buybacks at the level needed to
>ensure expected earnings growth on remaining shares, profits would have to
>continue to grow at truly unsustainable rates, right? But won't foreign
>investors continue to buy US corporate bonds to finance defacto this
>buyback as long as Greenspan keeps inflation in check even if they know
>deep down the US will have to organize the depreciation of its currency to
>honor obligations. These big comapnies have great lines of credit, so
>there is no fear of default. The Treasury will have to create reserves if
>they max out their lines of credit. Debt can be rolled over for a long

Sure it can, but not forever. Trees don't grow to the sky. Etc.

Firms cant issue bonds - borrow - forever. You can't use all your profits to buy back shares and pay the interest on your debt. We're getting into Minsky's "Ponzi" realm, if not a literal Ponzi scheme - where you can only service your debts with fresh borrowing.


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