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Cashing Out Options for Share Buy Backs

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November 28, 2007 – Comments (8) | RELATED TICKERS: BHP

I have consistently been disgusted by what I see in financial reports as directors consistently do what's best for their pocket at the gross expense of the shareholders.  The silence and continued support of shareholders of these stocks with executives robbing astounds me.

I think history will show that stock options for directors and share buy backs will be found to be the single largest events of their era to transfer, or steal, wealth from the average investor to corporate executives, the stuff of Richistan events.

I have looked a numerous financial reports where companies have borrowed money to buy back shares, shares that are already priced high.  What is tragic is many investors have cheer for the buy back programs and the share price is supported to a new level during the buy back, yet if you read the reports, by the time the executives have sold out their options, the total number of shares outstanding remain almost the same.  At first when I saw them I simply though they were dumb, as with BHP,  but I now see them as simply lining the director's pockets, a legal form of theft.

DELL comes to mind as a company that if you dig into their financial reports they've been doing buy backs, but the share count has hardly declined due to the paying out of options.  The earnings have essentially been paid to the executives though the stock options.

I was just reading Mish's blog and he's made a squandered money list of companies that are now issuing enormous equity because of their liquidity problem that bought back shares for enormous prices. 

My position is that many more companies belong on that list, and they don't all necessarily have liquidity problems, but the executives have taken much of the wealth and left a shell. 

8 Comments – Post Your Own

#1) On November 28, 2007 at 8:04 AM, abitare (35.58) wrote:

dwot, 

Another great write up. Thank you, again.

Are Canadians looking into buying properties in the US? It is cold er, but safer up there?

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#2) On November 28, 2007 at 8:14 AM, abitare (35.58) wrote:

Funny, coincidentally if you look at Mish's buy back list on the bottom of the page, all those listed have received a Red Thumb of Underperform from me for other reasons.

.

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#3) On November 28, 2007 at 9:35 AM, dwot (47.53) wrote:

Two markets in the world are officially bear markets now.  Sweden and China have both lost 20 or more percent since their last peak.

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#4) On November 28, 2007 at 2:01 PM, floridabuilder2 (99.24) wrote:

another topic i was discussing at the homebuilder show with some analysts was the overcompensation of public builder executives....  the company i left had over 100 executives make over 1 million a year (without stock options) in 2006.... think about that...

then of course as this analyst was complaining about our industry being over compensated vs other industries, i'm thinking... hey buddy how about you clowns on wall street.... talk about overpaid

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#5) On November 28, 2007 at 4:14 PM, zygnoda (27.24) wrote:

We just talked a little about this today in my accounting class.  I guess I'm not suprised this is how it works.  The guys at the top always do well.    Anyway, good post.

The wall street guys are not overpaid!  How dare you suggest that.

oh if you haven't seen this you should...

CEO Bill of Rights: Compensation     http://youtube.com/watch?v=yM-G1rVITVk Report this comment
#6) On November 28, 2007 at 6:29 PM, dwot (47.53) wrote:

floridabuilder, I suspect that many in both those industries are going to be in for a shock at the degree of job cuts...

zygnoda, I don't think it always worked like this.  If you look at a much broader picture, I think investor would have walked with their dollars at the behaviour that is happening today.

I worked in banking when I was young and then I went to chemistry and education and I did not look at finance that closely.  I started looking at this stuff through eyes that had lending and credit standards of the early eights.  The stuff I was looking at completely shocked me.  I figure the standards have been slowly relaxed over the past 20-25 years, and the bailing out by manipulating monetary policy by governments has enabled it to be more and more relaxed without any serious consequence.

So, investor's experience becomes, "I've seen that before and I did not hurt my investment," even when they might have had a sense that it was probably not a good thing.

I think a lot when I look at this I am applying the same standards as if I was loaning my money and expected the business to be able to pay me back in full, not just to pay a rate of return.

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#7) On November 29, 2007 at 1:32 AM, zygnoda (27.24) wrote:

'I think investor would have walked with their dollars at the behaviour that is happening today.'

I think the smart investors (like buffet) walk away from these types of companies.  I see it as a bigger problem for investors that aren't so savvy.  (but i'm just speculating...)

Also, I imagine some people don't notice it and others don't think there is anything they can do about it (so they put it in the back of their head and forget it).

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#8) On November 30, 2007 at 8:40 AM, dwot (47.53) wrote:

Exactly zygnoda, it has happened gradually.

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