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It seems pretty unreasonable to tie together stock buybacks and employee stock compensation. The reality is that companies using stock for employee incentives w

by boucher 12y ago

It seems pretty unreasonable to tie together stock buybacks and employee stock compensation. The reality is that companies using stock for employee incentives will necessarily have to create new shares fairly regularly. Buying back shares also has the fairly obvious correlation to increasing the per-share price. That both things happen at the same time in many companies is not surprising, but it's also necessary.

jerf 12y ago
"The reality is that companies using stock for employee incentives will necessarily have to create new shares fairly regularly." How does that work, exactly? Tone: Honest question. I don't understand how a company could create new stock for itself, since it seems like that would therefore dilute all current shares and thus being almost by definition against the interest of all current stock holders and therefore something they would not permit. (I say this not to argue it is therefore impossible, but to highlight what misperceptions I may have that need correction.)
- aaronblohowiak 12y ago
  Dilution is kind of like the company taking on debt -- it seems to be worse at face value, but looking deeper you can see that it is a tool that can be used to further increase or maintain value.
- pedrocr 12y ago
  Companies issue stock all the time when they want to raise capital. The transaction is neutral to the shareholders. Say a company is worth Y. In exchange for issuing X$ of stock the company receives X$ of cash and is now worth Y+X. Now the new shareholders own X$ in stock and the old shareholders Y$ in stock which is what the company was previously worth. Of course you only do this transaction if you believe the X$ in cash will allow you to grow the total value of the company so that Y grows more than it would had you not taken the cash. Now back to the stock incentives programs. Here you are issuing stock and giving it to your employees. Assume you had to give then X$ in cash as compensation, you could just do the same as before, raise that money in the market and give the cash to them. You might as well do it in one step giving them that value in stock and get the added benefit that those employees are now financially invested in the outcome of the company.
  - tacos 12y ago
    No. That's not how dilution works. Common sense: if issuing stock were neutral to shareholders, then buybacks would also be neutral to shareholders. (Splits are neutral to shareholders.)
    - pedrocr 12y ago
      > Common sense: if issuing stock were neutral to shareholders, then buybacks would also be neutral to shareholders. (Splits are neutral to shareholders.) Buybacks (and dividends) are indeed neutral to shareholders. You have a company that's worth Y and you buyback X$ using company cash, the shareholders now have in their hands a company that's worth Y-X and X$ in cash, for a total of Y.
      - tacos 12y ago
        No! OP is talking about shareholder dilution, not balance sheet shareholders' equity. Also, dividends reduce shareholder equity so even by your perverse definition they're certainly not "neutral."
        pedrocr 12y ago
        Dividends reduce shareholder equity and give shareholders the same amount of cash so they are indeed neutral if you ignore taxes. The same is true for the market value of a company. If a company has a market cap of Y and pays out X in cash the market cap will tend to reduce by roughly X in any normally functioning market.
    - goodcanadian 12y ago
      If you believe your stock is overvalued, sell it (or issue new stock). If you believe it is undervalued, buy it. If, however, you believe that the market is 100% efficient and the price is always just right, then both of these actions will be neutral to shareholders.
      - tacos 12y ago

by boucher 12y ago

jerf 12y ago

"The reality is that companies using stock for employee incentives will necessarily have to create new shares fairly regularly." How does that work, exactly? Tone: Honest question. I don't understand how a company could create new stock for itself, since it seems like that would therefore dilute all current shares and thus being almost by definition against the interest of all current stock holders and therefore something they would not permit. (I say this not to argue it is therefore impossible, but to highlight what misperceptions I may have that need correction.)

aaronblohowiak 12y ago
Dilution is kind of like the company taking on debt -- it seems to be worse at face value, but looking deeper you can see that it is a tool that can be used to further increase or maintain value.
pedrocr 12y ago
Companies issue stock all the time when they want to raise capital. The transaction is neutral to the shareholders. Say a company is worth Y. In exchange for issuing X$ of stock the company receives X$ of cash and is now worth Y+X. Now the new shareholders own X$ in stock and the old shareholders Y$ in stock which is what the company was previously worth. Of course you only do this transaction if you believe the X$ in cash will allow you to grow the total value of the company so that Y grows more than it would had you not taken the cash. Now back to the stock incentives programs. Here you are issuing stock and giving it to your employees. Assume you had to give then X$ in cash as compensation, you could just do the same as before, raise that money in the market and give the cash to them. You might as well do it in one step giving them that value in stock and get the added benefit that those employees are now financially invested in the outcome of the company.
- tacos 12y ago
  No. That's not how dilution works. Common sense: if issuing stock were neutral to shareholders, then buybacks would also be neutral to shareholders. (Splits are neutral to shareholders.)
  - pedrocr 12y ago
    > Common sense: if issuing stock were neutral to shareholders, then buybacks would also be neutral to shareholders. (Splits are neutral to shareholders.) Buybacks (and dividends) are indeed neutral to shareholders. You have a company that's worth Y and you buyback X$ using company cash, the shareholders now have in their hands a company that's worth Y-X and X$ in cash, for a total of Y.
    - tacos 12y ago
      No! OP is talking about shareholder dilution, not balance sheet shareholders' equity. Also, dividends reduce shareholder equity so even by your perverse definition they're certainly not "neutral."
      - pedrocr 12y ago
        Dividends reduce shareholder equity and give shareholders the same amount of cash so they are indeed neutral if you ignore taxes. The same is true for the market value of a company. If a company has a market cap of Y and pays out X in cash the market cap will tend to reduce by roughly X in any normally functioning market.
  - goodcanadian 12y ago
    If you believe your stock is overvalued, sell it (or issue new stock). If you believe it is undervalued, buy it. If, however, you believe that the market is 100% efficient and the price is always just right, then both of these actions will be neutral to shareholders.
    - tacos 12y ago