This is certainly true in terms of sustainability. The tax shield comes from option exercises, which only come from long term share price growth.
However, since most options issued are 10-years in duration, the long terms sustainability of this cash flow would have to do with not only long term share price growth, but also average employee tenure.
Thus, it should be a volatile cash flow, likely to vary with the stock market price in the short term. But in the long term, it should track the long term stock price, which you might believe tracks long term ROE, or ROIC, or discounted free cash flow.
Pretty circular, but like tax shields from debt, there is real value being created here.
I am torn though on the idea that this cash flow should get "a lower multiple" than other operating cash flows. Since multiples are just a proxy for doing a full discounted cash flow, I wonder, what is the correct rate to discount this cash flow?
I would think the correct rate would be a rate representative of the underlying risk, which seems to be the market risk of CSCO equity, which would be the SAME rate you would discount all free cash flow.
Thoughts? |
