People dislike share buybacks because they often feel as though there are more productive uses for the company’s cash or they would prefer their capital back in the form of a dividend. This is an argument that is open to debate as their are proponents on either side (cash payouts versus shrinking the float) with legitimate points.
But what about when a corporation is not merely pissing away cash by doing an ill-conceived buyback, but is actually using a repurchase plan to mask stock option dilution?
What happens when management pays itself a boatload in stock options at low issuance prices and then buys them higher as a matter of course?
How about a management team that uses obfuscatory statements about the timing of stock buybacks to manage their earnings growth and hide the natural dilution that should be apparent to investors?
I haven’t crunched the numbers here myself, but if Baruch and Bento are on the money, Cisco (CSCO) should be ashamed of itself and it’s shareholders should call for a stock option moratorium until Chambers et al come clean.
And just where is that $600 million?
We’re all aware that this stuff goes on, but I’ve yet to have seen such a succinct breakdown of this anti-shareholder practice until now. Cisco is just one example of a company engaging in this, but it’s a good example because of it’s size.
Ultimi Barbarorum‘s resident Spinoza scholars/ fund managers absolutely nail it with this post…so perfect I won’t even print an excerpt here just to make sure you click over and read the whole thing.
If you’ve ever owned a share of a stock (especially a tech stock), check it out:
Cisco earnings wildly overstated: management milks shareholders for fun and profit (Ultimi Barbarorum)
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