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Share counts don’t follow buybacks

Exec options return stock to open market

Companies often buy back their own shares, and Wall Street believes this enhances shareholder value. With fewer shares outstanding, earnings per share should climb, boosting the stock price.

S&P Capital IQ recently screened its database to look at buybacks by major media companies. The film and TV companies that bought back shares in the quarter ended June 2011 did have fewer shares in public hands, but the numbers don’t always add up.

CBS Corp. bought back 9.9 million shares, but retired only 6 million during the period — a 39% difference. Viacom had an almost 20% discrepancy between the 14.3 million shares it repurchased and the 11.4 million actually withdrawn from the market.

Why don’t share counts drop by the number of shares repurchased? Executive stock options may be a reason.

Execs exercising such options buy from the pool the company holds (called treasury stock), which includes some of the shares that were recently repurchased. Since the only reason to exercise a stock option is that the price execs will pay for the stock is lower than the market price, they often immediately sell those shares, returning them to the open market.

Thus shares the company may have repurchased in a buyback can go from “shares outstanding” to “treasury stock” and back to “shares outstanding” in no time at all.

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