Enrique Diaz-Alvarez enrique at ee.cornell.edu
Sun Mar 12 12:14:38 PST 2000

Jordan Hayes wrote:

> From enrique at anise.ee.cornell.edu Fri Mar 10 14:03:16 2000
> > Tell that to Microsoft ($17.8B), Intel ($11.5B), Cisco ($4B) ...
> Yep. And they spend nearly all of it in stock buybacks
> which, curiously enough, never actually decrease outstanding
> shares.
> It decreases the float.

Does it?. Those shares are given to employees exercising options, which of course turn around and dump them. And what's the point of the distinction, anyway? (assuming you still think of shares as part ownership in an ongoing concern, of course).

When stock options are such a huge part of compensation, earnings as currently reported (i.e., excluding the cost of stock options) are *not* a good measure of the company's ability to put money in sharehoders pockets.

> What exactly is wrong with buybacks?

Nothing, if they decrease outstanding shares. Intel and MSFT's stock buybacks don't, because they are not returning cash to shareholders, but compensating employees.

> Equity is an expensive way to finance growth; would you have a
> problem if, instead of selling stock INTC sold bonds and, as a
> result of generating over $20B in profits, they retired some debt?

I don't care how they finance their growth. I just think their reported earnings should bear some relationship to their profitability, i.e., ability to put cash in shareholder pockets, either now or at some point in the foreseeable future.

> And I think that, with Dell, that about covers significant
> cash flow in the NASDAQ.
> And it also accounts for ~37% of the NASDAQ index. Ok.

See previous e-mail. I was referring to *free* cash flow, which is much less than the figures you report. And even FCF doesn't account for the *need* to blow most, all or more of those theoretical earnings in stock repurchases for stock options, i.e., *employee compensation*. So no cash is available to put into shareholders pockets, via dividends or *real* buybaks, i.e., the ones that make remaining shares more valuable. Good thing they don't demand it anymore.

> To paraphrase Buffet, if stock options are not compensation,
> what are they? If compensation is not an expense, what is
> it?
> They are _deferred_ compensation, just like future sales are deferred
> revenues. But until they is, they ain't. Get it? The fact is
> that options are interesting and everyone has a hard time valuing
> them. Realistically, most exprire worthless. So your idea of
> accounting for them before they "are" anything is a little naive.

OK, account for them *when* they are exercised. Do you really see no problem with alleged "earnings" which ignore a cash-burning expense that, for most NASDAQ companies, is comparable in size to those earnings? Intel's cash stash is not increasing, and is actually decreasing slowly, in spite of alleged "earnings" equal to half that stash every quarter and essentially no dividend payment. Where the hell is all that cash going? Non-float decreasing fake "buybacks" for stock options, primarily.

> what about the main point, i.e., can tech companies actually
> put any cash in shareholders' pocket until their stocks
> decline significantly and void all those options?
> I'd say that buybacks are much more successful way of putting cash
> into the hands of shareholders. Dividends are so 20th Century.
> For a $100 stock, would you rather have a 4% dividend or a buyback
> that results in a 20% appreciation?

Huh? A 4% *real* buyback would decrease outstanding shares, well, 4%, which would make all other shares 4% more valuable. That is, if you regard stock as partial ownership of a business concern, instead of numbers on a screen that go up, which I guess is also very 20th Century.

Unless, of course, the point is to generate some momentum, get all the mo-mo investors to jump in, and unload your insider shares on the uptick, in which case 20% is actually a very conservative estimate of the result.

As I said, I have no problem with returning cash to shareholders via *real* buybacks rather than dividends, especially since they happen to be tax-subsidized.



1stUp.com - Free the Web®

Get your free Internet access at http://www.1stUp.com

More information about the lbo-talk mailing list