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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Rock who wrote (15094)	8/7/2002 11:19:48 PM
From: TimbaBear	Respond to of 78594

Rock You ask a lot of good questions. "...over the last 5 fiscal years, Intel has spent $17.8 Billion on share repurchases and yet the shares outstanding has remained roughly constant (actually they increased from 6.5 to 6.7 billion shrs). There are no notes in the most recent Intel report to rival Dell's candid admission of options-related dilution management and I suspect that one would find that some of this is acquisition related dilution management, but, in the end, it seems to be an all-the-same kind of thing. Are there any other reasons why this type of expenditure should occur w/o the reduction in shares out?" I haven't looked at INTC for quite some time, but I think I'll have to in the near future. My computer is down and I'm using someone else's to post. I expect to have my computer in the next day or two and then I have some catch-up to do with it as I have to re-install all my software and copy my files. So I can't say for sure whether I'll have the analysis done this week-end or not. If a company issued no stock options, but issued shares for acquisitions, then they might have a similar number of shares after a massive share repurchase program. I would look at notes to the financial statements as there usually is contained therein a listing of the options granted and those exercised. Taking the total spent on share buy-backs from the Statement of Cash Flows and the number of shares from the notes, I could determine the average cost/share during the buy-back. Knowing the number of options exercised, I could then multiply that number by the average cost per share to determine how much was spent to prevent dilution due to options. From a general perspective, it seems true to say that if a company is spending cash on share repurchases but the number of shares out is not declining, then the repurchase expenditure is not in the shareholder's interest I don't think I'd view it that way. I'd rather say that the shareholder's are able to benefit by seeing the true cost of options and therefore add it to the labor costs (or subtract it from cash flow). Additionally, it isn't the repurchase that is not in the shareholder's interest, it is the options granting process if it appears that it costs more than 20% of the net profits/free cash flow. Your comments are saying that from an analysis perspective, all cash spent on repurchases should be subtracted from FCF b/c it clearly reduces cash. No, that is not my position. Only that money spent on share buy-backs that are to prevent dilution from stock options exercise is to be subtracted from FCF. In and of themselves, share buy-backs are an optional use of free cash and should be added back into cash flow (using my bottom up methodology) when they serve as an investment of the company's cash. In this case, the company could have (theoretically) just as easily have employed the same amount of cash in CAPEX, debt reduction, or dividends, but chose share repurchasing as the best use of the money at that time. Far different thinking than preventing dilution due to stock options. Whether or not the repurchase expenditure should reduce reported earnings is a matter of the why's of the dilution management, yes? Yes Options dilution management is clearly compensation, so it indicates inflated earnings (e.g. Dell). Correct. But the way DELL did it, it also appeared to increase FCF by the short-cut formula that is most-widely used (CFO - CAPEX = FCF). The way they did it, it appears to be full disclosure with no impact to earnings or cash flow. A real trust-buster for me. Something like acquisition dilution management (i.e. you paid with shares but bought back to prevent dilution) is not part of COGS and so would not have affected net income. The broader picture here is much more complicated than this. Including a host of issues like goodwill, depreciation, CAPEX, acquired R&D that is written off, etc. etc. Also an accountant might have an issue with much of that going to the item "COGS". I think you meant somewhere that affected net income. In a narrower perspective, I think I would view the issue of share repurchase as an alternative use of FCF in all cases except those that I can clearly see that the real purpose was to mask a business expense (like options). Timba