Share Buy-Backs: The hidden option cost
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Share Buy-Backs: The hidden option cost

By mid-September, US companies had announced plans to buy back about $114 billion of their own shares, about two-thirds the amount announced in all of 1996, and one and a half times 1994's total, according to Securities Data. But while such buy-backs have been viewed as a bullish signal for the past few years, they are now increasingly viewed as little more than elaborate sleight of hand designed to con investors. If they've artificially boosted the stock market, as many now suggest, might the enormous overhang they are creating also trigger its fall?

Market strategists who once promoted the technique say they are now often tax gimmicks that can conceal an endeavour much costlier to existing shareholders - the issuance of stock options as employee compensation. "Buy-backs are overrated," says David Shulman, Salomon Brothers' US equity strategist, who says the process ends up overstating earnings, by a significant amount for some companies. "It's a huge understatement of compensation." As a result, he argues, stock values are inflated and there will be "disasters" down the road. "When this is all over, there will be several chapters written about it."

"For a lot of companies the share buy-backs are just fleeting purchases of common stock due to come onto the market at a later date," says Thomas McManus, US equity markets strategist at NatWest Markets.

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