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A URL was posted to this list some days ago to an article on stock options
(especially Microsoft) by a fellow named Parish. This is a far more reasoned
and less emotional presentation. The bottom line is that employee stock
options are funding a large portion of compensation, which is NOT showing up
in government labor cost statistics, and corporate stock buybacks are
helping to propel stock prices upward not to mention the holdings of the
really big fat cats making millions annually on executive stock options. The
FASB's proposal of several years ago to record stock option grants as a
business expense was greeted with a firestorm of corporate protest.
Stockholders don't care (yet) because stock valuations are rising at
extraordinary rates. At some point the party bowl will be smashed but I
wouldn't hold my breath.
Earl
----- Original Message -----
From: JW <JW@xxxxxxxxxxxx>
To: <realtraders@xxxxxxxxxxxxxxx>
Sent: Friday, November 19, 1999 2:11 AM
Subject: [realtraders] Mkt: Impact of stock buybacks on market {01}
> <I didn't see this get posted>
>
> Here is a very interesting story. Any comments?
>
> JW
> --------------
>
> From Nov. 15 issue of Businessweek
>
> Stock Market Time Bomb
> Buybacks and options: a lethal duo
>
> To put it mildly, stock buybacks are on a roll. Before the mid-1980s, they
> were on hardly anyone's radar screen. Yet last year, nonbank S&P 500
> companies shelled out nearly $150 billion to repurchase their own shares,
a
> stunning $35 billion more than they paid in dividends. What's behind this
> boom?
>
> Most companies say their goal is to raise stock prices by reducing shares
> outstanding, thus boosting pershare earnings. By using cash that way, they
> simply cater to the shareholding public's preference for getting their
> payouts in the form of capital gains rather than more highly taxed
> dividends.
>
> That, however, is not the full story. In a new study, Nellie Liang and
> Steven A. Sharpe of the Federal Reserve Board note that the buyback surge
> has been accompanied by a parallel rise in employee stock-option awards.
And
> while buybacks alone tend to push up stock prices, they find that the
> combination could spell trouble for stock prices in coming years.
>
> Stock options are a peculiar animal. Although they are a form of
> compensation, they aren't recognized as expenses in income statements and
> thus don't lower reported earnings. Once options are vested or exercised,
> however, they would obviously reduce per share earnings if companies
simply
> issued more shares to meet their option obligations. And that would hurt
> stock prices
>
> Enter buybacks. By regularly purchasing significantly more of their own
> shares than they currently need for option exercises, companies have not
> only prevented such dilution but have also tended to push up stock prices.
> And that has both enriched people holding options and pleased
shareholders,
> who might otherwise be upset by huge executive option awards.
>
> The big question is how long this game can go on. Liang's and Sharpe's
> analysis indicates that the rising volume of buybacks has reduced the
number
> of outstanding shares of large U.S. companies by about 1% a year over the
> past five years--presumably producing a steady upward pressure on share
> prices that has been magnified by being factored into market expectations.
>
> The problem is that option programs have been growing by leaps and bounds.
> Thus, companies have had to buy more and more shares just to offset the
> number issued for option exercises. And they have had to spend a lot more
> for those shares as stock prices have surged. Meanwhile, the cash received
> from sales of discounted shares to employees, which helps pay for new
> buybacks, has risen far more slowly.
>
> As a result, companies have been devoting more and more of their earnings
to
> buybacks. Even with dividends at historically low levels, total payouts to
> shareholders via dividends and buybacks have hit 80% of cash flow (chart).
> And since companies also continue to spend a big chunk of their earnings
on
> capital investment, they have had to go deeper and deeper into debt.
>
> Looking ahead, Liang and Sharpe think something will have to give. Over
the
> long run, they figure companies will continue to devote 40% to 50% of
> earnings to capital investment, forcing them to cut back sharply on
outlays
> for buybacks. If the net shrinkage of stocks falls from its current 1%
> annual pace to about a fifth of that, they estimate that stock prices
could
> decline by 30%.
>
> By GENE KORETZ
>
>
>
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