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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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From: Joe Stocks	7/15/2007 7:48:48 AM
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Corporate shenanigans. Excerpt from OptionInvestor.com weekend newsletter. optioninvestor.com >>>Thomson Financial reported 13 buyback announcements for the week for a total of $45 billion. This was the second strongest week on record. Recent announcements included GE $14B, COP $15B, Home Depot $11B, JNJ $10B and AMGN $5B. There were $117.7 billion in buybacks completed in Q1 and that was the sixth straight quarter over $100 billion in completed buybacks. In 2006 there were a record $432 billion in announced buybacks and Thomson is estimating that record will rise to $459 billion in 2007. You have to ask yourself why so many companies are opting for buybacks at market highs rather than using the cash in their business or giving the cash back in tax advantaged dividends. Could it be that so many executives at these companies are compensated based on stock prices? I am sure that is a big factor. Executives have compensation plans, which kick in at various stock prices, and the stock option plans are almost exclusively related to stock prices. Buying back stock benefits officers and employees more than the actual stockholders. Also, buying back stock increases earnings per share by reducing the number of shares in the calculation. That helps them beat earnings estimates, which makes them look like winners to the retail investor. Also, buying back stock does not erase it. That stock goes back into the company treasury and they can use it for acquisitions or stock options exercised by those executives with millions in stock option compensation. Follow this train of thought. Executives are given millions of shares of stock options, which are only exercisable above a certain stock price. The executives plan massive stock buybacks to temporarily push the stock prices higher. The company puts the shares in the treasury. The executives exercise those massive option grants and the stock comes back out of the treasury and into executive pockets. They then sell that stock back into the market making tens of millions in the process. The amount of stock in circulation did not go down materially and the price of the stock fades again when the shenanigans end. If they issued dividends to stockholders with a 15% tax rate it would be real money into the pockets of millions of stockholders. Instead the executives pocket the money and the stockholders end up holding the same stock as it fades back to mediocrity. Sorry for the rant but this buyback craze needs to be exposed for what it really is. <<

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