SBC is the most abused aspect of corporate finance today and US tech are the worst offenders. You miss a critical issue in your analysis. Repurchases to offset dilution typically happen at the time of vesting, so the true cost to the company and it's shareholders is not known until years after the grant. A windfall gain to the employee is paid for our of shareholder equity. It's a buy high from the market and sell low to the employee strategy . Madness! But the employees won't complain. Oddly enough, neither do most shareholders! Fools.
Fairfax Financial do it better. At the time of the grant, long before vesting, they buy stock in the market and hold it as Treasury Stock thereby fixing the cost. For every other company, the SBC cost on the 8k and 10k are just fictional numbers, usually vastly underestimating the true cost. It would be great to see your first chart redrawn with the true cost based on how much the company spends on repurchases to offset dilution (cash flows from financing).
All that repurchase activity - buying at any price regardless of intrinsic value - artificially inflates the stock price and causes market efficiency to break down and bubbles to form. Apple has seen flat to deteriorating top and bottom line numbers since 2022 yet the share price has doubled - this is why - It can't end well. It's why Buffett sold down his stake.
More shareholders need to take notice of this egregious behaviour and stop acquiescing. Regulations need to wake up!
I agree, in terms of integrating repurchases I tend to take a more draconian approach and treat the decision to repurchase shares as a completely separate decision tree from employee compensation.
There's really no such thing as buybacks to offset dilution. There is gross dilution from SBC/M&A/etc that is an input into the model and then the determination to repurchase shares (or dividends) is a completely separate output that theoretically should be unrelated to management's decision on how to compensate it's employees.
Any net dilution number inclusive of repurchases is a nice way to combine those two but I think it's better to look at them separately so you can better hold management accountable to their dilution decisions.
Dividends vs Repurchases is a capital allocation decision - often not done well.
I also don't like the dividends vs repurchase option. I don't think that repurchases should be considered as returns of capital to shareholders. A better framework is to think of them as paying down equity capital (the most expensive form) - and so they should be considered equivalent to paying down debt, albeit with different drivers. Debt repayments usually follow a fixed schedule, while paying down equity ought to depend on whether or not the stock trades at an attractive discount to intrinsic value.
This brings me on to our debate. Repurchases done properly should be determined by the prevailing share price - yet so many companies repurchase shares quarter after quarter with no regard to share price. Why? Poor management? Perhaps. But the better explanation is that they are transferring wealth from external shareholders to the pockets of insiders, and they need to conceal it. This is where the dilution offset occurs.
This toxic behaviour, which the regulators should have stopped long before now, is why companies like Apple spend tens of billions each year on repurchases regardless of the share price, economic fundamentals or anything else. Worse still, this artificial demand for shares at any price distorts the market. It's why many tech firms are in a bubble - just look at Palantir for example - its a joke.
So the true cost of SBC could be calculated by the amount of money the company spends on these over priced buybacks to offset dilution, and that would reveal just how bad the situation is. Corporate capital being plundered by insiders rather than being put to productive use. It explains why there are so many tech billionaires these days. It's daylight robbery happening in plain sight. And the regulator? Nowhere to be seen.
SBC is the most abused aspect of corporate finance today and US tech are the worst offenders. You miss a critical issue in your analysis. Repurchases to offset dilution typically happen at the time of vesting, so the true cost to the company and it's shareholders is not known until years after the grant. A windfall gain to the employee is paid for our of shareholder equity. It's a buy high from the market and sell low to the employee strategy . Madness! But the employees won't complain. Oddly enough, neither do most shareholders! Fools.
Fairfax Financial do it better. At the time of the grant, long before vesting, they buy stock in the market and hold it as Treasury Stock thereby fixing the cost. For every other company, the SBC cost on the 8k and 10k are just fictional numbers, usually vastly underestimating the true cost. It would be great to see your first chart redrawn with the true cost based on how much the company spends on repurchases to offset dilution (cash flows from financing).
All that repurchase activity - buying at any price regardless of intrinsic value - artificially inflates the stock price and causes market efficiency to break down and bubbles to form. Apple has seen flat to deteriorating top and bottom line numbers since 2022 yet the share price has doubled - this is why - It can't end well. It's why Buffett sold down his stake.
More shareholders need to take notice of this egregious behaviour and stop acquiescing. Regulations need to wake up!
I agree, in terms of integrating repurchases I tend to take a more draconian approach and treat the decision to repurchase shares as a completely separate decision tree from employee compensation.
There's really no such thing as buybacks to offset dilution. There is gross dilution from SBC/M&A/etc that is an input into the model and then the determination to repurchase shares (or dividends) is a completely separate output that theoretically should be unrelated to management's decision on how to compensate it's employees.
Any net dilution number inclusive of repurchases is a nice way to combine those two but I think it's better to look at them separately so you can better hold management accountable to their dilution decisions.
Thomas, I respectfully disagree.
Dividends vs Repurchases is a capital allocation decision - often not done well.
I also don't like the dividends vs repurchase option. I don't think that repurchases should be considered as returns of capital to shareholders. A better framework is to think of them as paying down equity capital (the most expensive form) - and so they should be considered equivalent to paying down debt, albeit with different drivers. Debt repayments usually follow a fixed schedule, while paying down equity ought to depend on whether or not the stock trades at an attractive discount to intrinsic value.
This brings me on to our debate. Repurchases done properly should be determined by the prevailing share price - yet so many companies repurchase shares quarter after quarter with no regard to share price. Why? Poor management? Perhaps. But the better explanation is that they are transferring wealth from external shareholders to the pockets of insiders, and they need to conceal it. This is where the dilution offset occurs.
This toxic behaviour, which the regulators should have stopped long before now, is why companies like Apple spend tens of billions each year on repurchases regardless of the share price, economic fundamentals or anything else. Worse still, this artificial demand for shares at any price distorts the market. It's why many tech firms are in a bubble - just look at Palantir for example - its a joke.
So the true cost of SBC could be calculated by the amount of money the company spends on these over priced buybacks to offset dilution, and that would reveal just how bad the situation is. Corporate capital being plundered by insiders rather than being put to productive use. It explains why there are so many tech billionaires these days. It's daylight robbery happening in plain sight. And the regulator? Nowhere to be seen.