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Is your stock really making a profit?
I mean, really???
I don’t mean did its management play the beat-the-analysts-estimate shell game.
Often you find some of the most excellent pearls in Barron’s Mailbag. The below letter appeared this week, and no stock investor should fail to heed its message.
Bundles Of Options
For those contemplating an investment in Cisco ("Cisco’s Bundles Of Joy", Oct. 9), bear in mind that Cisco spent the bulk of its profits the past 12 years to buy back 1.5 billion shares issued to employees in lieu of cash compensation.
Stock option exercises dilute shareholders. Rather than shrink the share count, as Cisco’s CFO claims, Cisco’s buybacks merely stemmed the tide of dilution. Stock repurchases that combat dilutions are a roundabout way of paying compensation.
Cisco employees hold another 1.4 billion stock options. A 22% ownership dilution threatens - not counting any future option grants - unless the company spends the next decade’s profits on share repurchases. Cisco shareholders are on a treadmill to nowhere.
Albert J. Meyer
Bastiat Capital
Plano, Texas
In other words, Cisco shifted a huge portion of employee compensation off the earnings statement by using stock options. This made profits appear far larger than they really were. Then the real expense of that compensation was touted as a return to shareholders, thus counting the money twice.
No wonder so many companies prefer share buybacks to paying dividends on their stock. Once real cash is actually paid to shareholders, there is no opportunity to take it back and use it over again. You have to make real profits in order to pay money out to shareholders without running the company into the ground. Floating new shares and diluting shareholders is the corporate equivalent of governments and central banks inflating and diluting the money supply, appropriating value from all holders of the respective securities without their knowledge or approval.
Demand dividends. If your company is really and truly making a profit, just say:
Show me the money!
I mean, really???
I don’t mean did its management play the beat-the-analysts-estimate shell game.
Often you find some of the most excellent pearls in Barron’s Mailbag. The below letter appeared this week, and no stock investor should fail to heed its message.
Bundles Of Options
For those contemplating an investment in Cisco ("Cisco’s Bundles Of Joy", Oct. 9), bear in mind that Cisco spent the bulk of its profits the past 12 years to buy back 1.5 billion shares issued to employees in lieu of cash compensation.
Stock option exercises dilute shareholders. Rather than shrink the share count, as Cisco’s CFO claims, Cisco’s buybacks merely stemmed the tide of dilution. Stock repurchases that combat dilutions are a roundabout way of paying compensation.
Cisco employees hold another 1.4 billion stock options. A 22% ownership dilution threatens - not counting any future option grants - unless the company spends the next decade’s profits on share repurchases. Cisco shareholders are on a treadmill to nowhere.
Albert J. Meyer
Bastiat Capital
Plano, Texas
In other words, Cisco shifted a huge portion of employee compensation off the earnings statement by using stock options. This made profits appear far larger than they really were. Then the real expense of that compensation was touted as a return to shareholders, thus counting the money twice.
No wonder so many companies prefer share buybacks to paying dividends on their stock. Once real cash is actually paid to shareholders, there is no opportunity to take it back and use it over again. You have to make real profits in order to pay money out to shareholders without running the company into the ground. Floating new shares and diluting shareholders is the corporate equivalent of governments and central banks inflating and diluting the money supply, appropriating value from all holders of the respective securities without their knowledge or approval.
Demand dividends. If your company is really and truly making a profit, just say:
Show me the money!
;)
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