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Technology Stocks : Dell Technologies Inc. -- Ignore unavailable to you. Want to Upgrade?

To: Voltaire who wrote (83813)	12/5/1998 10:35:00 AM
From: TCBinAugusta	Read Replies (1) \| Respond to of 176387

<<When a company gives its insiders more in options and less in salary (a popular maneuver these days), it boosts the stock price, indirectly. By reducing salaries, the company also reduces expenses, which adds to earnings. Higher earnings convince investors to pay higher prices for the stock. THE PROBLEM arises when the recipients of options decide to convert their options into actual shares. This puts more shares into circulation, which lowers earnings per share and makes the stock less attractive. When enough bigwigs sell their shares to reap their rewards, the stock price will fall, undermining the aforementioned buyback. Dellheads will wish the company had sent them a dividend instead of spending the money on internal maneuvering.>> Interesting comment. However, reported E.P.S. is generally computed on an "as if" basis and assumes that all outstanding options that would be exercised at the reporting date (ie: those that the option holder has a "profit" on) are exercised and the related shares are included in the denominator of the E.P.S. calculation. Therefore, the "insider" options are already factored into E.P.S.. I personally still prefer a stock buy-back to a cash dividend. TCB, CPA

To: Voltaire who wrote (83813)	12/5/1998 12:59:00 PM
From: Chuzzlewit	Read Replies (2) \| Respond to of 176387

Voltaire, you are semi-correct, but have made some errors in you comments. First, options are nearly always immediately converted to shares and sold for tax reasons (avoidance of alternative minimum tax). In any case, companies are now required to report shares outstanding on a fully diluted basis which assumes full conversion of all outstanding options. So the problem is not in the denominator. The real problem is in the numerator. The reason is that there is a cost to issuance of options, and this cost does not appear on the income statement. So what happens is that income (without a provision for the cost of issuing stock options to top management) is divided by fully diluted shares. There is nothing wrong with stock buybacks -- as Geoff, TCB and others have pointed out they are really surrogates of dividends. The problem is with the people who focus on eps and inflated eps growth as a result of buybacks, because these buybacks create a leverage which most people don't understand. For those who would like to play with a simple example, suppose that a company in year 0 has earnings of $100 MM with 100MM shares o/s. Now in year 1 it earns $115 MM, but during the course of the year it reduce the number of shares o/s to 92 MM, so now earnings are $1.25 per share. So while the company as a whole is growing its earnings at 15%, eps appears to be growing at 25%. In theory, what ought to be happening is that the share price should not change. The reality is that some investors view share buybacks not as surrogates for dividends (in which case the share price would remain constant), but as a sign that management believes the stock to be undervalued. TTFN, CTC