Dilution is what happens to existing owners when a company creates new shares.
Dilution is what happens to existing owners when a company creates new shares.
The company's profit does not change when it issues shares to employees. The number of claims on that profit does. So each share represents a slightly smaller slice than it did before.
Companies report this in two share counts.
Basic shares. The shares actually outstanding, averaged over the year.
Diluted shares. That count plus the shares that would exist if awards already granted turned into shares. Unvested units. Options that are in the money.
Earnings per share is calculated both ways. Basic EPS uses the first count, diluted EPS the second. Diluted is the lower number whenever the company is profitable and it is the one to use, because the promises behind it have already been made.
Apple for the year that ended September 30 2023.
Check both. $96,995 million over 15,744,231 thousand shares is $6.16. Over 15,812,547 thousand it's $6.13. The filing's figures and the arithmetic agree.
Now size the dilution. 15,812,547 minus 15,744,231 is 68,316 thousand shares. Against the basic count that's about 0.43%.
In earnings terms that's three cents a share. $6.16 becomes $6.13.
That is a small number and it is small for a specific reason. Apple grants a lot of equity and it also buys back enormous quantities of stock, which is tomorrow's class. At a company that does the first without the second, the same calculation produces a much larger gap.
The trap is thinking dilution costs you money as an employee. It doesn't. It costs the existing shareholders, and you are being paid out of it. Dilution is the mechanism by which equity compensation is funded.
Where it matters to you is in judging a grant at a company that is still private or newly public. If the company keeps issuing shares, your fixed unit count is a shrinking share of the whole. The unit count in your agreement is not a percentage of the company and it does not stay one.
The second trap is quoting basic EPS because it is the bigger number. Diluted is the honest one. The awards behind it are already granted and the shares will arrive as they vest.
The third trap is assuming diluted share counts capture everything. They include awards in existence now. They cannot include next year's grants, which is why a company's share count can keep climbing even when its diluted figure looks stable.
A colleague says Apple's equity compensation must be crushing shareholders because the expense is nearly $11 billion.
What was the actual dilution that year?
68,316 thousand shares. About 0.43% of the basic count.
What did it do to earnings per share?
$6.16 basic against $6.13 diluted. Three cents.
Why is the dilution so small next to an $10,833 million expense?
Because Apple repurchases shares at a scale that more than absorbs the new ones. The expense is real. The share count barely moves.
What would the same expense do at a company that does not buy back stock?
The share count would rise by the full amount of the shares issued and the gap between basic and diluted EPS would be far wider.
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