ATG -
The company reported net earnings of $1B (lets assume that cashflow from operations is the same), but its number of shares is unchanged, and its net assets are $500 Million smaller then last year because they had to pay for the stock they bought. There is no new asset in the balance sheet which the $1.5B paid for, only avoiding the dilution by new stock arising from employees' options.
The function of the $1.5B buyback is the same as $1.5B increase in the wages paid by that company, but it does not show in its income statement as wages would have.
This company does not create value, it actually lost $500 Million for that year. Where did the $1.5B difference disappeared into?
Functions and explanations don't matter, only actions do.
All of the actions have to be considered separately, before coming up with a net result, which is usually not possible.
1. The company has granted options to its employees for any or all of a number of reasons, but they all (ignoring alignment of worker incentives with company performance)boil down to being competitive in the labor markets to succeed in recruitment and retention, and doing so at a lower cost than if only cash salaries and bonuses were paid. This is a fiduciary responsibility of management to make judgements to maximize the value for shareholders.
2. The decision to buy back stock is essentially the same as for any other investment. There is always one range of stock prices low enough to provide a higher projected return to shareholders than any alternate investment and there is always another range of stock prices high enough to rule out buybacks. Again, this all has to be justified from the POV of the shareholders, who are the owners of the funds used in the buyback.
3. Being an investment, the $1.5B cannot and does not appear on the income statement. It may be a horrible investment, but the $1B in earnings still remains.
4. Both salary expenses and stock dilution are real costs to shareholders.
Regards, Don |
