Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Shareholder Dilution Delusions

Investors generally consider stock buybacks an effective tool for enhancing shareholder value because they reduce outstanding shares, increasing the ownership percentage of existing stockholders. That's great in theory, but as Rich Smith points out in his Symantec (Nasdaq: SYMC  ) piece, buybacks are often used to disdainfully mask the dilutive effects of stock option grants, and quietly transfer shareholder wealth to employees.

Intel (Nasdaq: INTC  ) is a perfect example. The chip company's basic share count declined by 234 million shares from 2001 to 2003, a result of $12 billion in stock repurchases. In those three years, Intel bought back a total of 492 million shares at an average price of $24.46, while 237 million options were exercised for an average price of $14.05, including the company's tax benefit. The company also issued 21 million shares associated with acquisitions.

Here's the repurchase breakdown: 234 million shares repurchased for the benefit of stockholders and 237 million shares handed over to employees for a $10.41 loss per share -- a total transfer of $2.5 billion in shareholder wealth to employees. Whatever euphemistic spin management uses to describe this redistribution, it's still a lot of money. Not to mention other issues the company is dealing with related to stock options.

I call attention to Intel only as an example, and don't think for a moment it's the only company that does this. For instance, in 2003 alone, Cisco (Nasdaq: CSCO  ) transferred $182 million to employees, Oracle (Nasdaq: ORCL  ) $170 million, and EMC (NYSE: EMC  ) $41 million. And lest you think only tech companies are guilty of this deceptive practice, even motorcycle company Harley-Davidson (NYSE: HDI  ) gave away $20 million in shareholder capital to employees in 2003. That may sound like a minor amount, but it's enough to have added $0.06 to the dividend, which is a more appropriate use of excess cash. (If more companies considered this, Mathew Emmert's job might be a little easier over at Motley Fool Income Investor.)

Investors shouldn't be deluded by claims of enhancing shareholder value through stock buybacks. The use of shareholder funds to stem stock option dilution is a real cost, one that can't be found in earnings, operating cash flow, or even free cash flow. So the next time one of your companies proclaims its love of shareholders by announcing a buyback, be skeptical, because if deceptively shifting money from owners to employees enhances shareholder value, you have to wonder what destroying it looks like.

Fool contributorChris Mallongets burned up when he sees management waste shareholder dollars. He owns shares of Harley-Davidson through his private investment partnership.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 508277, ~/Articles/ArticleHandler.aspx, 10/23/2016 7:59:25 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:00 PM
CSCO $30.15 Down -0.01 -0.03%
Cisco Systems CAPS Rating: ****
EMC $0.00 Down +0.00 +0.00%
EMC CAPS Rating: ****
INTC $35.15 Down -0.28 -0.79%
Intel CAPS Rating: ****
ORCL $37.93 Down -0.16 -0.42%
Oracle CAPS Rating: ****
SYMC $24.08 Down -0.12 -0.50%
Symantec CAPS Rating: ***