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Egregious buy-backs + stock comp


Guest Grey512
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Guest Grey512

Lately, when looking at 10Ks and cash flow statements, I've noticed something peculiar. Many companies are issuing stock options & stock-based comp whilst doing stock buy-backs at the same time. This is effectively a wealth transfer from common shareholders to insiders.

 

I had some spare time so I started to see if there are commonalities to this whole thing. The worst offenders generally tend to (i) investment banks & financial advisory firms (Canaccord Genuity; Jefferies; Piper Jaffray; Evercore), (ii)  tech firms (FireEye; Tivo; CommVault; HP).

 

Some of the popular stocks amongst value investors also suffer from this issue. Outerwall: stock comp as % of market cap is massive at 3% (at the same time, massive buy-backs are going on). Similar thing with eBay. Similar thing with Micron.

 

Just thought I'd share it with this board to see if you guys noticed this and how do you deal with it. Would noticing something like this stop you from investing in the stock?

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Won't stop me from investing in the company. It's par for the course for tech companies as you observed. Just ignore their non-GAAP make-believe earnings and stock "buybacks".

 

Same with overpaid CEOs. It's an issue, I vote against it, but I ignore it in buy/sell decisions. ;)

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Well one could argue that stock compensation is a more effective salary payment to employees since stocks don't get taxed at 100% like salary. So instead of paying an employee 100k in salary and in the end he's left with 75K you could pay 85K in stock options an he's left with 75k in the end.

 

I would expect to see a lower SG&A from stock options focused payment firms but higher dilution. Overall a slight positive over salaries.

 

BeerBaron

 

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Well one could argue that stock compensation is a more effective salary payment to employees since stocks don't get taxed at 100% like salary. So instead of paying an employee 100k in salary and in the end he's left with 75K you could pay 85K in stock options an he's left with 75k in the end.

 

I would expect to see a lower SG&A from stock options focused payment firms but higher dilution. Overall a slight positive over salaries.

 

BeerBaron

 

Only incentive stock options seem to have this tax benefit, but that requires you to hold it for a year after exercising the option. I've rarely seen execs holding it for a year. They usually sell on the day of exercise.

 

RSUs seem to be taxed just like cash.

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Agreed RSU are taxed like income... and they should be. I should have clarified that I was talking about stock options.

 

On the other hand RSU appear directly as an expense in the SG&A. So there is really no difference between RSU compensation or cash when you look at net income.

 

All an all, I'm fairly neutral about stock compensation for as long as the compensation is adequate and fair to all stakeholders.

 

BeerBaron

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