Expensing Stock Options

You may to check out Barron’s Online this week. The site is free-for-all for a limited time. Andrew Bary has a good article on the impact of expensing stock options, especially in the tech sector:

Tech outfits tend to be generous dispersers of stock options. At Intel and Cisco, the value of these are expected to equal about 13% of profits this year, versus 3% at Pfizer (PFE) and less than 1% at General Electric (GE).
Cisco reported “pro-forma” profits, excluding option expense, of 26 cents a share for its quarter ended Jan. 28, and of 22 cents, with option expense. Some investors and analysts, hoping for earnings that would justify a high stock price, still focus on Cisco’s pro-forma results.
Nonetheless, says David Bianco, the chief equity strategist at UBS. “There are not too many investors out there who think stock options aren’t an expense.” Option grants have been falling in recent years — Cisco, however, issued more in its latest fiscal year than in the prior one — and Bianco wonders how much further they’ll slip now that expensing is mandatory. He estimates that options will cut profits for the S&P 500 by about $2 this year, off an earnings base of around $80. That’s a hit of roughly 2.5%. The hit in tech will be an estimated 15%.

Posted by on February 14th, 2006 at 12:44 pm


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