Please excuse me, Cat, for adding to your response.
Remember Geoff, when DELL buys back shares (the last quarters' buy backs were at ~$32.00 per share) it does this with call options.
In DELL's case, management can see the company's growth further out than we can. So, they sell long-term puts and use the money to buy long-term calls, making the puts pay for some of the premium in the calls. Management knows that 6-24 months down the road they will have increased earnings with a high probability of higher stock price.
Bottom line: if a company were simply paying market price to buy back shares, then you are correct in that we need to look at opportunity cost. In this case, when management is able to get a 50-75% market discount, it becomes more difficult to find better opportunities.
That is why, whenever one buys long-term DELL puts, he is betting against Michael and Mike's team... similar to blindfolding oneself to play against Michael Jordan.
FYI: page 26 of the 1997 annual report lists 'put options' with a value of $279MM under Liabilities and Stockholders' Equity.
And the beauty of the buy-back, as Chuzzlewit pointed out, is that the tax burden of the stock dividend is passed on to the recipient. I haven't noted a great weeping and wailing and gnashing of teeth on the part of the recipients. <g>
Regards, 3 |
