Preview from Europe: Stocks Log Worst January Ever [View article]
Mole, thanks for your succinct summary, and particularly for the great Monty Python sketch!
There was another Ponty Python (the "Village Idiot" perhaps?) in which the idiots discuss stock investments intelligently, as the pundits blather stupidly about them. If you can locate it, please consider posting it as appropriate.
I posted the comment below in response to another article on this website, just a few days ago. It bears repeating, as I believe many shareholders may not have realised how management uses share buy backs to defraud them:
Dividends benefit all shareholders equally, while buybacks disproportionately benefit management who have options.
If you are a CEO of a company with a stock price of $20 and have an option on a million shares at $22. A year later, the stock price has gone up to $23. Your options are now worth $1 each, i.e. $1,000,000. Now the company has $1 per share of surplus cash which can either be paid in dividends or used to buy back, let's say, 10% of the outstanding shares.
If you pay out the $1/share in dividends, all shareholders, you the CEO included, benefit equally, and your take is modest, just the dividend on the shares you already own.
If you buy back 10% of the stock, the price per share for the 90% remaining outstanding share increases by 1/0.9=11%, so your options are now worth 1.11x23 minus the strike price of 22 = $3.53 per option, i.e. $3,530,000 instead of $1,000,000 that they would have been worth if you paid the $1/share as dividend.
Thus, you the CEO, get $3.53 m instead of $1m if you buy back shares, whereas if you paid dividends your extra income per share that you already own will just be as modest as what the other shareholders get.
If company proxies were voted by knowledgeable shareholders, share buy backs would either be disallowed, or any outstanding options should be re-priced upwards to reflect the reduced number of shares outstanding.
The reality, however, is that most shares are voted by mutual fund managers, who are either ignorant of the basic math, or who are members of a "club" that includes the management, so options are not re-priced to adjust for fewer shares outstanding, and share buybacks are used to enrich option holders at the expense of the other shareholders.
Preview from Europe: Stocks Log Worst January Ever [View article]
There was another Ponty Python (the "Village Idiot" perhaps?) in which the idiots discuss stock investments intelligently, as the pundits blather stupidly about them. If you can locate it, please consider posting it as appropriate.
Don't Buy Into Share Buybacks [View article]
Dividends benefit all shareholders equally, while buybacks disproportionately benefit management who have options.
If you are a CEO of a company with a stock price of $20 and have an option on a million shares at $22. A year later, the stock price has gone up to $23. Your options are now worth $1 each, i.e. $1,000,000. Now the company has $1 per share of surplus cash which can either be paid in dividends or used to buy back, let's say, 10% of the outstanding shares.
If you pay out the $1/share in dividends, all shareholders, you the CEO included, benefit equally, and your take is modest, just the dividend on the shares you already own.
If you buy back 10% of the stock, the price per share for the 90% remaining outstanding share increases by 1/0.9=11%, so your options are now worth 1.11x23 minus the strike price of 22 = $3.53 per option, i.e. $3,530,000 instead of $1,000,000 that they would have been worth if you paid the $1/share as dividend.
Thus, you the CEO, get $3.53 m instead of $1m if you buy back shares, whereas if you paid dividends your extra income per share that you already own will just be as modest as what the other shareholders get.
If company proxies were voted by knowledgeable shareholders, share buy backs would either be disallowed, or any outstanding options should be re-priced upwards to reflect the reduced number of shares outstanding.
The reality, however, is that most shares are voted by mutual fund managers, who are either ignorant of the basic math, or who are members of a "club" that includes the management, so options are not re-priced to adjust for fewer shares outstanding, and share buybacks are used to enrich option holders at the expense of the other shareholders.