re Forbes article </>Stock options are not a free lunch
... What companies do not like to do is remind shareholders though it is obvious to people like Buffett-that options are highly dilutive. ...
I believe that DELL has been reporting fully diluted earnings for some time now. ==> no hickey
... Smithers &Co. hastens to make clear that it cannot guarantee the precision of its numbers, because the nature and availability of the data required it to make a number of assumptions. But if it erred at all, they believe they erred on the conservative side. ...
Does that sound like a SWAG to you, too?
... Smithers comes up with its figures by adding together the estimated value of options that were exercised during the year and the estimated cost of immunizing the company against future increases in its stock price, which would have the effect of upping its total option costs. The estimated immunization cost covers two factors: the difference between the share price and exercise price on existing options and costs associated with net new option grants. ...
We know that DELL buys calls on its own stock and sells puts. So the cost of the options -- as long as earnings and growth are good, because the puts expire worthless -- is exactly the difference between the call purchase price and the put sale price, plus commissions.
... One way to cover the cost of delivering options to workers, says Daniel Murray, is to buy the equivalent amount of listed options in the open market at the time of the option grant. This would immunize the company against price increases in the stock, and prevent earnings dilution. ...
DELL does this.
... In a separate calculation, Smithers &Co. assumes that companies would borrow the funds necessary to buy the options on the shares dedicated to employee option plans; interest expense is estimated at 5% a year. A company interested in fully accounting for the cost of its options each year thereafter would have a recurring expense as it issued new options and went into the open market to hedge against them. Smithers figures that the average expense to fully hedge employee option positions at the 100 companies analyzed would have amounted to 21% of earnings in 1997. ...
A textbook example of GIGO. DELL finances by selling puts. Any additional funds required come from its modest cash flow. Interest expense? In Cramer's words, WRONG!!!
... Indeed, Dell Computer, in its most recent annual report, says its pro forma option costs in fiscal 1997 amounted to only $22 million pretax. This, even though it issued almost 43 million shares at a weighted average fair value of $3.73 each. ...
Quod erat demonstrandum.
The article also points out the tax advantages to the corporation of using the options to transfer the capital gain to the individual employee. Gotta love that DELL!!!!
Note: If and when DELL ceases to buy back shares would be a good time to revisit your *bloated* theory.
Ps. You never did provide your estimate of where DELL's price would go based on announced earnings of .42 .46 .50 >.50 I will give Jim P credit for at least providing his best guess.
DELLish, 3.
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