CTC -
[[...True. But my focus is on the investor (not the company), and the profit the investor realizes by holding a share of stock...]]
I must have not been clear. I am NOT saying that dilution of any type, including options, is NOT a cost to the shareholders. I AM suggesting that the appropriate way to deal with it is in the 's' of 'eps', not to make an imaginary adjustment to the 'e'. The company as an accounting object need include NO information as to how the ownership is distributed. The share count is a time series of values, not a single number, just as earnings is a time series. If it were up to me, diluted share count would include all outstanding options, independent of whether they are in the money or not, and the trend and projection of that series would be acted upon by real investors, thus helping to control the self-serving impulses of management.
If a company grows earnings by 30% per year, a total rate of growth of 3% per year of share count would be perfectly acceptable if it were real and not disguised by buybacks using up shareholder funds which might be better utilized by other investments or as actual distribution as dividends. The buyback of shares is an independent investment decision that must stand on its own merits, the same as any other investment, and not used to hide dilution and management enrichment. Given that I would prefer that all option grants are added to diluted shares and included until revoked or disgorged, I have no real objection to a controlled amount of re-pricing as they replace options which no longer serve any purpose if they are far out of the money.
Part of the fallacy of trying to assign a value to option grants is an economic confusion between value, price and cost. There is no such thing as an intrinsic value of an economic good. All values are subjective and subject to the law of decreasing marginal utility. Price only has meaning as the result of a series of real market transactions. It is popularly believed that an exchange of economic goods, including money, sets an equality of value between the quantities of goods exchanged. Nothing could be further from the truth. Any exchanges actually made indicate that the participants are achieving the widest possible discrepancies available to them in their individual contrasting subjective valuations of the goods exchanged, and of other goods not exchanged.
Regards, Don |
