Jim, as Geoff Nunn pointed out, buying back your own stock entails an opportunity cost even at the risk-free interest rate, so total earnings would have been higher. But, as I argue later on, the price per share of the stock would drop if the company did not repurchase shares. See the last paragraph for an explanation.
The sale of puts, like all transactions involving your own stock, does not impact earnings (it is to be found in the equity section). But the cash generated from that activity generates interest which is an income statement item. Unfortunately, Dell's various stock-related transactions are so frequent and so complex that it is not easy to unwind them. To put it another way, I can't entirely unwind them. Perhaps someone else on the thread can.
But just to give you a flavor of what I'm talking about, at the end of Q3 1996 Dell reported a book value of $893 MM, while at the end of Q3 1999 it reported a book value of $1,947 MM. This is an increase of $1,054MM. By contrast, during that same period Dell reported earnings of $2,568MM. Now assuming that the difference (some 1.5 billion) represents share buybacks alone (I know -- there is a lot more going on) and assuming that the current risk-free rate is 4% and neglecting the interest earnings that might have been generated in the interim, that represents $25.7MM for this quarter in foregone interest, or based on the average number of shares o/s during Q3 of 96, almost $.016/ share. Assuming a 30% tax rate that amounts to a little over $.011/share.
Jim, this analysis is very simplistic, but there is some cost to share buybacks. On the other hand I believe there is a definite benefit, because this looks to me like a tax-advantaged DRIP. Second, and more important, given that the average cost of capital is significantly higher than the interest-free rate, I would expect the price per share to decline if Dell did not repurchase its shares or dividend the cash to shareholders. The reason is that theoretically, at least, when a company invests in an opportunity yielding less than its average cost of capital, the price of the stock will fall. So the only ways to open to maintain shareholder wealth is to either dividend the excess cash or to repurchase stock. Given the tax advantages I believe share repurchase is best.
TTFN,
CTC |
