Stock options have gotten a richly deserved tarnish lately. From backdating to springloading (granting options just prior to issuing good news), the disconnect between the interests of management and shareholders has only gotten wider. And when companies announce stock buybacks in an attempt to cover the diluting effects of options, they taint what otherwise should be positive news.

A bigger slice of the pie
When I first read that power-tool maker Black & Decker (NYSE:BDK) was authorizing an additional eight million shares to be repurchased -- more than 10% of all shares outstanding -- I must admit that I was jaded enough to think its management was up to something. After all, over the past few years, Black & Decker's shares have been trading at some of their highest levels. A company should purchase its shares at a discount to its intrinsic value, not at a premium, for the most effective use of shareholder money.

When a company announces a share repurchase program, investors are usually heartened by the news, because the buyback increases the value of the shares that remain outstanding. Larger pieces of a smaller pie become more valuable.

Microsoft (NASDAQ:MSFT) also announced a big buyback, as much as $20 billion worth of stock, as did Juniper Networks (NASDAQ:JNPR), International Paper (NYSE:IP), and CSX (NYSE:CSX). So far in the month of July, more than 40 companies have announced their intention to repurchase their shares.

Yet not all share repurchases are equal, and while I was initially skeptical that Black & Decker's buyback announcement was the best use of shareholder money, I've since concluded that, yes, sometimes stock options do align management and shareholder interests. I think Black & Decker investors have gotten a pretty good deal on the whole. While some of the buybacks the company has done over the past few years have masked the dilutive effects of stock options granted, executives have ultimately purchased more than they've doled out.

Black & Decker Share Dilution (in millions)

2003

2004

2005

2006*

Shares outstanding

79.6

77.9

82.1

77.4

Stock Options Issued

0.3

4.0

1.4

0.2

Restricted Stock Granted

0.0

0.3

0.2

0.0

Shares Repurchased

2.0

0.0

6.3

1.8

Balance

77.9

82.1

77.4

75.7
*As of April 2, 2006

There have been approximately six million shares issued under various stock option plans over the past few years, and more than 10 million repurchased. And even when those shares have been bought back at some of the highest prices at which the stock was trading, management was able to increase their value even further. For example, back in 2003, roughly two million shares were repurchased at around $50 apiece; that approximately marked the beginning of a two-year rise in the company's share price. (It ultimately went as high as $95 a share, but has since stalled.) B&D's management realized there was good value to be had in buying back its stock at the time, and shareholders reaped the benefit.

Investors need to decide, however, whether the company's most recent buybacks are as good a value, and whether the newly authorized buyback will continue to enhance shareholder value. Between Oct. 3 and Dec. 31 of last year, Black & Decker repurchased 1.23 million shares at an average cost of $82.83 per stub. The 1.8 million shares bought back in the first quarter of this year were bought at an average price of $83.81 per share, and the stock is currently trading in the mid $70s.

Drilling down to value
Is Black & Decker a good value at these prices? Has management identified greater value than it can still squeeze out? The company has a stable of top-quality names in power tools, including Porter-Cable, Delta, DeWalt, and DeVilbiss, as well as the high-end Baldwin Hardware, Weiser Lock, and Price Pfister in its hardware division. Black & Decker covers the home improvement market by selling its products to the retailers who have cornered that market: Home Depot (NYSE:HD) and Lowe's (NYSE:LOW). Its profitability has been strong, while return on assets and capital remain at some of the highest levels in recent years. Black & Decker's enterprise value-to-free cash flow ratio is about 13; that's not exceptionally cheap, but does put the company in a fairly valued range. It's also generating about a half-billion dollars worth of owners' earnings each year.

Using that cash to buy back its shares, while also paying a $0.38-per-share quarterly dividend, seems to be using its capital in a shareholder-friendly way. Yet caution needs to be taken here. The housing boom that helped raise the value of B&D's stock is cooling off a bit. Remodeling and home improvement may begin to slacken, depressing sales of door locks and power saws. Revenue growth over the trailing 12 months ending in April is up only 12%, compared to 25% last year. Over the last two quarters, revenues have seen virtually no growth at all.

Home improvement
Black & Decker hasn't yet been caught up in the stock option backdating scandal that has a lot of corporate front offices scrambling to restate past financial statements. Nor has it yet become part of the newest scandal, regarding options grants just prior to the release of good news. Options are supposed to align management and shareholder interests, though they are more often used simply as executive enrichment. Black & Decker, however, has thus far generated good returns for investors with its repurchases.

While its most recent share repurchases have seemingly come at a premium, the latest authorization could simply be management foreseeing a coming softness in its stock price, and wanting to have some powder dry. Investors would do well to imitate that thinking, since Black & Decker looks like a solid company that could be a good buy after a pullback in the stock price.

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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. The Motley Fool has a disclosure policy.