This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Putting Fat Cats on a Capital Starvation Diet

Editor's Note: This column is a special bonus for TheStreet.com readers. This piece originally appeared on RealMoney on May 27, and we're giving it to you in its entirety. To sign up for RealMoney, where you can read Arne Alsin's commentary regularly, please click here for a free trial. Also, if you're interested in chatting live at 1 p.m. today with Arne, please click here to sign up.

Starve them of capital. That's the simplest solution to what I've called "Corporate America's Dirty Little Secret" -- namely, the enormous transfer of wealth from shareholders to corporate employees in the form of stock options.

Starving them of capital means avoiding owning their stock. More than anything else, the issues of capital and stock value resonate in corporate boardrooms. If and when the big guns such as Fidelity, Vanguard and other large institutional shareholders draw a line in the sand and say "enough," the grab for shareholder property will be over.

Spa Diet

Consider Elizabeth Arden (RDEN), a leading fragrance maker that sells products such as Elizabeth Taylor's Passion and that recently secured Catherine Zeta-Jones as its spokeswoman. It's an interesting turnaround stock with a lot of potential pop. It's a $200 million company that could be worth $600 million or more with a successful turnaround.

However, two significant problems make it a nonstarter. First, long-term debt is too high at $317 million on a revenue run rate of about $750 million. This ups the stakes considerably for the owners of Elizabeth Arden equity. With such a weak balance sheet, the company doesn't have a lot of time to get it right with consumers.

Second, this company appears to be run for the benefit of management. Management's grab for shareholder property is excessive by any measure. In fiscal 2001, the company granted options representing 16.4% of shares outstanding, with one-quarter of that going to the CEO.

When the stock rallied in fiscal 2002, the number of options granted dropped considerably to about 1.3% of shares. But in fiscal 2003, the stock slid back to fiscal 2001 levels, and there was another big grant -- this time representing slightly less than 6% of shares.

The grab for shareholder property at Elizabeth Arden -- of roughly 25% of shares outstanding over the past three years (including some restricted stock grants) -- can be summarized easily enough: It's all about what management thinks it can get away with.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
AAPL $130.28 0.00%
FB $81.53 0.00%
GOOG $565.06 0.00%
TSLA $218.42 0.00%
YHOO $44.52 0.00%

Markets

DOW 18,080.14 +21.45 0.12%
S&P 500 2,117.69 +4.76 0.23%
NASDAQ 5,092.0850 +36.0220 0.71%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs