Symantec's Bizarre Swap

Two weeks ago, I took information security company Symantec (NASDAQ:SYMC) to task for putting up impressive financial results -- and then diluting them with stock options. That piece got some attention back at Symantec HQ, it seems, and pretty soon, I had the company's PR department knocking at my door, demanding a recount.

Maybe I am just being "spun," but on further examination Symantec's arguments do hold some water (there are also some holes in its arguments, and I will get to them, too). So I decided to do a closer examination of the company's stock dilution machine -- past, present, and future.

Here's how it breaks down:

Symantec recently ordered up a $240 million increase in its share buybacks, bringing the total value to just under $1 billion. However, I was mistaken in concluding from this fact that fiscal 2005 dilution would therefore amount to 9.3%. The truth of the matter is that Symantec has already spent the bulk of the buyback money. In fiscal 2005, "only" about $180 million will be spent. Thus, to achieve its stated target of 3% share dilution, Symantec will actually experience pre-buyback dilution of 4.2%.

Is that too much? In this Fool's opinion, it is, and it will have a material effect in depressing the company's 2005 diluted per-share earnings. However, I must admit that 4.2% dilution is a darn sight better than 9.3% dilution. So, score one for Symantec.

There is, however, some bad news for Symantec shareholders. For any fact that you can spin one way can also be spun the other. Granted, stock dilution may not be as bad as I thought it would be in 2005 -- but that also means it was worse than I thought for the years 2001 to 2004, when the bulk of the buyback money was actually spent.

From 2001 to 2004, Symantec's share count increased from 272.9 million to 359.6 million, for a combined share dilution of 32%. That was after buybacks of 44.9 million shares, however. Absent those buybacks, Symantec's dilution would have been 48% in three years. That's not unusual in tech company circles (thinkXybernaut (NASDAQ:XYBR) or Symantec competitorNetwork Associates (NYSE:NET)). But it remains a stain on Symantec's historical balance sheet that the company should strive to erase.

So while I am pleased that Symantec intends to rein in stock dilution, it bears pointing out that the shareholder-friendly way to accomplish this is not by issuing shares and then buying them back. It's by not issuing them in the first place. That's a massive redistribution of shareholder wealth to company insiders. And painting it all as a reduction of dilution is, frankly, insulting our intelligence.

What do you think of Symantec's share dilution? Share your thoughts on the Symantec discussion board.

Fool contributor Rich Smith does not own shares of any of the companies mentioned in this article.