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Technology Stocks : Qualcomm Incorporated (QCOM)
QCOM 157.80+0.9%Jan 22 3:59 PM EST
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To: Elroy who wrote (122024)7/24/2002 9:16:37 AM
From: Wyätt Gwyön  Read Replies (4) of 152472
 
no, it is not double counting, because the expense of option grant is compensation the moment it is given, whereas dilution to EPS happens much further down the line (perhaps a decade later). if you followed that double-counting line of thought, you could have a co with fully diluted EPS of $1 a share in year 1.

let's say in Q4 year 1 it earned 25 cents, and it granted options equal to 10% dilution. however, these options do not immediately dilute the EPS, even though they immediately compensate employees. this means that the EPS understates the true expenses for year 1 by 10%. the bubbleheads will argue that eventually the dilution will "catch up".

but this is BS, because in year 5 (when the dilution catches up), the co will issue another 10% options grant, which it will again not expense and thus overstate earnings in year 5.

so you really need to think about the immediacy of options as compensation. expensing captures this, whereas dilution down the road does not.

as another example, let's say i have 100K and use that capital as margin to sell naked calls. i will immediately receive cash for the calls (just as a company immediately receives work for the calls it gives employees) (call that Process 1). only down the road will i know to what extent my 100K base capital will be "diluted" by call-holders exercising the calls i sold them (call that Process 2). so they are two separate processes.
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