Hi Bobf:
Here is an example where an easily seen problem arises in not adjusting reported free cash flow in some manner to reflect the stock option problem: Oracle, and I believe Dell, have made it a company policy over the years to repurchase shares to counteract dilution. It is my further belief that these repurchases have been on average, at much higher prices than the exercise price money coming in. Furthermore, when these companies repurchase shares, retained earnings is generally reduced by a cash amount equal to the repurchase amount. Thus the stock option program taken in its entirety is ultimately resulting in cash reductions to retained earnings that is not reflected in the reported earnings or reported free cash flow numbers.
Both reported earnings and reported free cash flow numbers which do not take into account stock option expense, are very poor indicators of these companies abilities to grow and retain wealth from internal business operations for the benefit of outside shareholders. And both reported numbers, unadjusted for stock option expense, make extremely misleading cross industry, cross company comparisons, with companies who do not heavily employ stock options.
JMO, Huey
P.S In cases where companies do not repurchase shares, outside shareholders also pay for the stock options program, but the trail is not quite as easy to follow as it is in the case of share repurchases. There are no free lunches as "Technet" and "AEA" would try to tell us. |
