A Costly Tech Buyback

Whoever said stock options don't cost anything?

After the bell Thursday, Texas Instruments (NYSE: TXN  ) announced that its board had authorized the repurchase of up to 21 million shares. The purpose? "To neutralize the potential dilutive effect of shares expected to be issued upon the exercise of stock options."

That's it.

We tend to applaud repurchases as an efficient means for companies to return value to their shareholders -- more efficient than, say, paying a taxable dividend. However, a share buyback only creates value when your company pays, at worst, fair value for the shares. That's not the case here.

Texas Instruments isn't out to create shareholder value by purchasing undervalued shares. Its stated purpose is to neutralize potential dilution, but with shareholder cash. If nothing else, this tells us that stock options definitely carry a cost, and possibly worse.

We've discussed that very issue in the past. Among others, Cisco Systems (Nasdaq: CSCO  ) , Microsoft (Nasdaq: MSFT  ) , and Dell Computer (Nasdaq: DELL  ) have been guilty of buying back overpriced shares expressly to offset option-related dilution. When a company overpays for its shares, it destroys value.

We can debate whether Texas Instruments' shares are overvalued. Either way, selling (options) low and buying back (shares) high involve very real costs that investors should be aware of.

Give us your take on the Texas Instruments discussion board.

Fool contributor Jeff Hwang owns none of the aforementioned companies.


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