What I perceive to be your idealism on this issue may be valid...
..I have never given it much thought. It always seemed to make good
business sense to me.
Nor have I ever questioned how a CFO arrives at how many puts
or what strikes. I merely presumed that;
¯ A company decided to enhance shareholder value thru a stock
repurchase program. This, in itself, is admirable to me...
in the past too many companies have gone on acquistion binges with
their earnings. This may or may not enhance value downstream. A stock
repurchase, on the other hand, lends validity to the theory that a
company's management believes in the quality of it's earnings and has
faith in it's future...at least near-term
¯ There was a rational method arrived upon to achieve this repurchase.
For example, the figure of 100 million dollars was allocated to this
endeavor. However that number was arrived at, I don't know. I
would imagine it was a decision based on some awareness of what excess
earnings would be left over after taxes, dividends, et cetera, in the
coming period. These guys have to have some idea what projected
earnings would be, yes?
Now, presumably, these people have some financial acumen. One would
hope so. I, for one, would be concerned if Intel or who ever was run
by a bunch of engineers without anyone up top that could converse
intelligently with an investment banker on something other than
differential equations.
Logically, then, this would not be a willy-nilly decision. "Hey
Bob! The market just crashed! Let's sell some putz!!!!" It did not
do Victor N. any good and, in theory at least, he knew what he was
doing. (Of course, he was probably trying to play catch up on that
other wise move he made in Thailand the day before)
So....here's a company that decides it's stock is undervalued at $20.
It has 100 very large to go. At $20 it can buy up to 50,000 shares.
How does it do it? I doubt it would send a Stanley Druckenmiller in
and tell him to sit on the bid....it would also be a waste of time to
the company to "time" the market so buy on the dips....
It may be that it's prudent to write 5000 puts at $20...perhaps some
more at 17.5 -- then buy some stock with the proceeds plus a portion
of the original nut. This is not speculation, to me, this is a plan.
As long as it is a reasonably thought out plan....as long as they were
committing the funds to a buyback anyway....it seems to take a lot of
the guesswork out.
If IBM announced a buyback program, one does not expect IBM to enter
the market the next day and "take it and bid it" until they run out of
cash. On the other hand....who would want IBM to hire some rocket
scientist to decide when to time the re-purchase...just so he can
waste the board's time to get the okay.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Anyway, I'm too long-winded about this.... I understand that you
prefer to see the monies re-invested in growth. I believe that putting
some of these monies into a re-investment in company stock adds to
growth. A strong stock price is very helpful for raising capital if
necessary. Re-purchased shares can be used for employee incentives,
for leverage in mergers or acquisitions (another form of growth),
...and if I might have to benefit from any given company's positive
stock action as the result of a stock re-purchase program, by gum I'm
just gonna hafta live with it, Gawd Bless America.
”¨”
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