Share Buybacks

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Postby yielder » 31 May 2006 06:10

Gus wrote:In practice, stock options probably align management and shareholder objectives less badly than other incentive plans do.


Maybe; maybe not. Now that stock options have to be expensed, other forms of Long Term Incentive compensation can be considered. As an investor with a long term orientation, I want management with a long term orientation. Restricted stock recognizes longevity but not performance. Performance can be recognized by determining the size of the initial grant or to affect the vesting period.

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Postby Taggart » 31 May 2006 10:54

As an investor, I would prefer that any company with excess cash return it back to the shareholders as a dividend. That way, even after taxes, I decide where I want to invest the excess capital.
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Postby kcowan » 31 May 2006 11:11

Taggart wrote:As an investor, I would prefer that any company with excess cash return it back to the shareholders as a dividend. That way, even after taxes, I decide where I want to invest the excess capital.

While the logic is sound, the after-tax impact is different.
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Postby Taggart » 31 May 2006 11:23

kcowan said:

>>>While the logic is sound, the after-tax impact is different.<<<

If I was in a higher tax bracket, I might be singing a different tune (not forgetting the corporation gets taxed). Just think in terms of how Buffett and Munger allocate their own excess capital amongst their various enterprises.
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Postby NormR » 31 May 2006 11:34

After Enron, Corporate Wrongdoing Still Thrives

Now, it would be nice if the Lay and Skilling convictions marked the end of this kind of fraud. The terrible part is that it's still going on in a huge way. Lately, investigative reporters at "The Wall Street Journal," aided by university professors, are discovering that top executives at some of the biggest companies in the nation are looting their companies in an almost unbelievably brazen way.

This is how it was carried out: Companies often issue stock options to executives as part of their compensation. These options allow managers to buy stock at a certain price, supposedly chosen based on an average stock market price for a period or some other similar metric. If the stock price rises above that option "strike" price, the boss makes money. If the stock falls below it, he doesn't.

But the men in these recently uncovered deals were apparently secretly and fraudulently back-dating the strike price to be the lowest price of the year or the quarter long after the stock had risen dramatically from that price. Thus, a huge profit was built into the deal, a kind of profit totally unavailable to executives at honestly run companies -- and to ordinary stockholders.
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Postby Gus » 31 May 2006 12:05

yielder wrote:
Gus wrote:In practice, stock options probably align management and shareholder objectives less badly than other incentive plans do.


Maybe; maybe not. Now that stock options have to be expensed, other forms of Long Term Incentive compensation can be considered. As an investor with a long term orientation, I want management with a long term orientation. Restricted stock recognizes longevity but not performance. Performance can be recognized by determining the size of the initial grant or to affect the vesting period.

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I would agree that restricted stock does a better job of making executives into shareholders rather than option holders, and thereby aligns managers' and owners' interests much better.

My intention was to compare options with other bonus mechanisms, such as measuring a certain operating cost, which would lead to accounting games where, for example, certain operating expenses would get capitalized, making the manager look good and the shareholder no better or even worse off. I have seen such incentive programs end up distorting the business and producing odd results. Ultimately, the only performance measurements that matter are the company's stock price and its ability to pay out sustainable dividends.

The design of SARS incentives programs is surprisingly difficult in practice, since every company is unique in its mix of businesses -- finding a good comparison peer group is not that easy. I recently worked at one company that had a SARS program in which the company underperformed relative to its peer group even though the absolute performance of the stock had been excellent. Guess what happened next: when the SARS day of reckoning came there was a lot of talk about how the peer group comparison was invalid and unfair (with some good arguments mixed among the BS) and the board duly coughed up a hefty SARS payment even though this payment should have been zero.
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Postby Taggart » 31 May 2006 13:02

Microsoft CEO defends cash 'problem'

Steve Ballmer says the company would rather have too much cash on hand rather than return it to shareholders.

May 31, 2006: 10:01 AM EDT
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Postby Taggart » 31 May 2006 13:39

Morningstar (U.S.)

Options Backdating: Will Your Stocks Pay the Price?

What to do if a company you own is caught up in the scandal.

by Pat Dorsey, CFA | 05-31-06 | 06:00 AM
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Postby Small Investor Activist » 31 May 2006 14:01

I sent this thread with some quotes to some contacts on my hotmail list, this is a response from Bill Mackenzie of ISSProxy:

"I have watched stock options mushroom in popularity during the 1990s.
During this period, the yield on the S&P 500 index stocks sank to its lowest watermark in decades. The popularity of stock options has peaked in the US, albeit at a much loftier (read expensive) peak than we have ever seen in Canada, at least so far.

I see a stock option problem surfacing in Canada. Resource companies, buoyed by high resource prices, are stock option gold mines not only for
management, but also directors. It seems that some directors of some of the smaller resource companies have seen fit to grant themselves ever larger option packages. Although non-executive director compensation has topped the $100,000 mark at some of Canada's largest companies, we are seeing some packages top $500,000 and even $1 million at some smaller ones. For example, non-executive directors of Yamana Gold believed they were worthy of a grant of 1.5 million Yamana options in 2006. Averaging 300,000 options per non-executive director, with an exercise price of just under $10, these options had a Black-Scholes value in excess of $1,000,000 per director at the time of grant. By the time we obtained the proxy circular, they had an
intrinsic value of nearly $1 million per director. There was nothing in the
proxy circular to support such an exceptionally large compensation package, which had mushroomed from the previous year's. Unfortunately, there are others like Yamana.

What this means is that the concept of accountability needs to be reinforced with many boards. The language of proxy circulars with regard to director options invariably reads "the company granted options to directors..." as if there were some superior being "the company" that was there to deal at arms length and look after shareholder interests. Is this what "independence" has come to mean? How independent are directors that pay themselves such fees?

Does casting a withhold vote punish these mega-grant directors? With our plurality system, they get elected. Usually even vote results posted on SEDAR disclose that directors were elected "by show of hands" at the
meeting, so even the embarrassment of a high withhold vote by proxy is
unlikely to be felt outside the boardroom. Fortunately, we have the press, who are merciless on perceived abuses. Yet the press will not win the battle if shareholders are standing silently on the sideline."


Hot off the press:

Canadian Press
Wednesday, May 31, 2006

TORONTO — CEO compensation isn't closely linked to a company's stock market performance, a study by the Ontario Teachers' Pension Plan suggests.

"The results of this study raise serious questions about the alignment between CEO compensation and the market performance of their companies,” said Brian Gibson, senior vice-president of public equities for the pension plan.

The study examined a sample of 65 TSX-listed companies that had share price data dating back to Jan. 1, 1995. The companies were among the largest 100 companies at that time and are active today.

The comparison was based on company results from 2001 to 2003 and compensation for the years 2002 to 2004, to look at CEO pay.

"In recent years, many boards have tried to improve the link between executive pay and company performance,” Mr. Gibson said. ”While a few individual companies may have made good progress, in general there is no empirical evidence that compensation has become better linked to performance.”

Gibson urged active and retired teachers who are shareholders in Canadian companies to ask boards to find ways to improve the link between pay and performance.

http://www.globeinvestor.com/servlet/st ... 1/GIStory/
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Postby Taggart » 31 May 2006 14:37

This item is a few days old:

Published: Thursday, May 25, 2006

BMO raises dividend bar

Bank of Montreal unexpectedly announced it will pay out more of its earnings to shareholders in the form of dividends than any other Canadian bank yesterday.

The banks are flush with billions of dollars of excess capital and have been under pressure to announce significant growth plans such as acquisitions.

However, BMO's surprise announcement seems to indicate the bank hopes to keep investors happy by increasing the amount of cash it pays out to shareholders, possibly putting pressure on its rivals to follow suit with bigger dividend payouts of their own.

"We are sitting on quite a bit of excess capital and frankly I think all the Canadian banks are sitting on more excess capital than any other banks in the world," said BMO chief financial officer Karen Maidment.

BMO alone had $3.4-billion in excess capital at the end of the second quarter of 2006. "At some point, you need to say we have enough and the rate at which we are going to accumulate excess capital can be slowed," said Ms. Maidment.
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Postby yielder » 07 Jun 2006 11:41

Put CEOs' pay in escrow, former SEC head urges

Companies should set aside the majority of their chief executive officers' pay in escrow accounts, awarding it only years down the road if there have been no corporate scandals, former SEC chairman Harvey Pitt says.

Mr. Pitt, who now runs Washington-based consulting firm Kalorama Partners LLC, said yesterday he believes executive compensation deserves to be high, but said the way managers are paid needs to be fundamentally reformed to ensure they are creating real long-term value.

"By looking at short-term factors, managers are not building long-term value and fundamental value," he said in an interview. "This is a real problem in our market, and it's something the government can't legislate."
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Postby Brokeree » 23 Jul 2006 13:30

yielder wrote:
Check to see what they've been doing with options to management & what exercising of options has been occuring over the period of the buyback. Buybacks can offset the dilution effect of large numbers of options being exercised.


I really do hope that some day I'll understand that statement quoted from Yielder message. Yielder you too good for my horizons of inv's and I feel little :cry:
And how will my stocks pay back for a company who plans to buyback their shares ?
And last but not least in DenisD schedule are figures in the "-" . means that's when they bought back ?
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Postby DenisD » 24 Jul 2006 01:40

Brokeree wrote:And last but not least in DenisD schedule are figures in the "-" . means that's when they bought back ?


Negative numbers means the number of shares increased in the 6 month period. This could be because insiders exercised options, shares were created for DRIPs, etc
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Postby Brokeree » 24 Jul 2006 08:01

DenisD wrote:
Brokeree wrote:And last but not least in DenisD schedule are figures in the "-" . means that's when they bought back ?


Negative numbers means the number of shares increased in the 6 month period. This could be because insiders exercised options, shares were created for DRIPs, etc


Is that good or bad :lol:
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Postby yielder » 24 Jul 2006 08:21

Brokeree wrote:I really do hope that some day I'll understand that statement quoted from Yielder message.


In the meantime, keep it simple and ignore buybacks. Just focus on understanding the company and its financials and the industry it operates it.
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Postby Brokeree » 24 Jul 2006 11:05

:x :evil: still my question is is that good or bad :?: as per my last post
Yielder I don't focus now on buybacks I'm just to catch up with that knowledge stream and info flow
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Postby yielder » 24 Jul 2006 11:51

Brokeree wrote::x :evil: still my question is is that good or bad :?: as per my last post
Yielder I don't focus now on buybacks I'm just to catch up with that knowledge stream and info flow


Chill out if you want to have a discussion.

My response was based on the fact that you really don't to spend much time thinking about buybacks. In theory, they are good but they may not be anything more than a wash if the company has been issuing lots of stock options that are dilutive when exercised.

And how will my stocks pay back for a company who plans to buyback their shares ?


Who knows?
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Postby MaxFax » 26 Jul 2006 17:39

yielder wrote: In theory, buybacks are good
Most of the time buybacks are the worst option of a list of opportunities. This is not a simple question, with a simple answer. This is outlined at:

http://members.shaw.ca/RetailInvestor/t ... ml#buyback

yielder wrote: but they may not be anything more than a wash if the company has been issuing lots of stock options that are dilutive when exercised.
Stock buybacks NEVER wash out the effects of options. The issue is pure math. See:

http://members.shaw.ca/RetailInvestor/t ... ml#netback
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Postby MaxFax » 27 Jul 2006 13:59

yielder wrote: Keep it simple and ignore buybacks. You really don't need to spend much time thinking about buybacks.

To show how wrong this is: I just completed an anylysis of Q:SNHY Sun Hydraulics. Their last three years look great. EPS $.22 $.76 $1.17 Gross Margin 26% 30% 32% Net margin 3% 8% 11% ROE 5% 16% 24%. It is only after you calculate the cost of options that were hidden by the buy-backs of new shares do you see what you are buying.

In the 2005 year the published EPS was $1.17. But $0.455 never got to the balance sheet because it was spent on options exercised. That is 39% of Net Income. As well the intrinsic market value of the options STILL outstanding was a further 11% of of the year's Net Income

Needless to say I passed on buying this..
Last edited by MaxFax on 28 Jul 2006 18:20, edited 1 time in total.
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Postby yielder » 28 Jul 2006 10:08

MaxFax wrote:To show how wrong this is:


Yes and no. For a [s]small[/s] micro cap like SNHY, you do all the digging and analysis that you can which includes looking at option granting, option exerecise, and share buybacks. For a small growth company with limit resources and access to financial markets, buybacks are an extremely bad idea. For a large cap, it's not that important. IMO has a long history of stock buybacks but any analysis of the company isn't diminished much by ignoring the option/share buyback/dilution effect.

When Brokeree was asking, my response was thinking about large cap blue chip type companies. I've said elsewhere that you can do far less damage to your portfolio with these kinds of stocks. I've also said that as the capitalization of the company decreases, the amount of digging-type research increases.


Code: Select all
Year    IMO Shares O/S (M)
1996    476.89
1997    447.98
1998    431.48
1999    431.48
2000    398.26
2001    379.16
2002    378.86
2003    362.65
2004    349.32
2005    332.63
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Postby yielder » 30 Jul 2006 06:59

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Postby gitterm » 30 Jul 2006 17:38

When a company buys back shares does the company also have to increase the dividend to make up for the dividends that they not longer need to payout or do they just keep this extra cash?
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Postby AltaRed » 30 Jul 2006 18:39

gitterm wrote:When a company buys back shares does the company also have to increase the dividend to make up for the dividends that they not longer need to payout or do they just keep this extra cash?


The cash is kept in Treasury. Dividends are always based on a per share basis (on shares outstanding).
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Postby gitterm » 30 Jul 2006 19:14

Ok they keep the cash in the Treasury. What does that mean? How is that Extra cash used? In the long run that could add up to alot of cash that should be paid out to shareholders. Am I correct on that?
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Postby Bylo Selhi » 30 Jul 2006 19:37

gitterm wrote:Ok they keep the cash in the Treasury. What does that mean?

Exactly what it says. If there are 1M shares outstanding, the company earns $2M and dividends out $1M then each share earns $1. If they buy back 100k shares then there are still 1M outstanding, but $100k of the dividends get paid back to treasury, i.e. are reycled back into the company.

How is that Extra cash used? In the long run that could add up to alot of cash that should be paid out to shareholders. Am I correct on that?

Yup. One thing they could do is increase the dividend, say from $1 to $1.11. But in that case they'd be paying themselves (recycling) $111k on account of the 100k shares in the treasury.

Another thing they could do if they don't want to recycle dividend income is to retire the 100k shares that are in treasury. Now there are only 900k outstanding and if they pay $1.11 dividends they'll maintain the $1M dividend payout. This also has the advantage that it increases the earnings per share from $2 to $2.22 (even though they haven't earned so much as another penny.) See the article that yielder linked to above for more information.
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